Business Transition: When Options Include Bankruptcy

While only 10% of small business would file for bankruptcy today, over 60% are carrying pandemic debt of about $160,000 according to the CFIB.  This is worrisome given new data out of the U.S., where close to 50% of small businesses are at risk of shutting down[1].

Meanwhile here in Canada, small businesses also face CRA audits of their pandemic supports. For example, did you know:  

  • When a taxpayer declares bankruptcy, a trustee is deemed (by S. 128(2)(a)) to be the taxpayer's agent for income tax purposes. 
  • S. 128(2)(d) deems that the bankrupt has two taxation years (and thus files two personal tax returns) in the year bankruptcy is declared.
  • The first taxation year (the pre-bankruptcy period) ends the day before the declaration and the second taxation year (the post-bankruptcy period) begins the day of declaration.
  • In addition, the trustee must file a return covering the trustee's dealing with property and business of the bankrupt.

An important question in these cases: Will families who file bankruptcy still qualify for their Canada Child Benefits? The answer is yes. Specifically, under subsection 122.61(4) of the Income Tax Act the CCB:

  • shall not be subject to the operation of any law relating to bankruptcy or insolvency;
  • cannot be assigned, charged, attached or given as security;
  • does not qualify as a refund of tax for the purposes of the Tax Rebate Discounting Act;
  • cannot be retained by way of deduction or set-off under the Financial Administration Act; and
  • is not garnishable for the purposes of the Family Orders and Agreements Enforcement Assistance Act.[2]