Bankruptcy Information

Amounts to be included

Pre-bankruptcy return: All income of the taxpayer for the period between January 1 and the day before bankruptcy shall be included.

Post-bankruptcy return: All income of the taxpayer from the day of the bankruptcy until the end of the year shall be included except for income that must be entered in the trustee's return.

Deductible amounts

Pre-bankruptcy return: All applicable deductions may be claimed.

Post-bankruptcy return: All applicable deductions other than carry-over losses (lines 251, 252 and 253) may be claimed.

Basic personal amount (line 300): Is prorated between pre and post-bankruptcy returns based on the number of days in each period. This calculation is performed automatically by the program as long as the type of return (pre or post-bankruptcy) and the date of the bankruptcy are entered.

Age amount (line 301): Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Where you are filing a return either for the pre or post-bankruptcy period, make sure that the taxpayer's net income for the other period is entered in the appropriate cell.

Spousal or common-law amount (line 303): Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Make sure that the spouse's net income for the whole year is taken into account in each return.

Canada caregiver amount for spouse or common-law partner, or eligible dependant age 18 or older (line 304) : Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Make sure that the spouse's net income for the whole year is taken into account in each return.

Amount for an eligible dependant (line 305): Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Make sure that the dependant's net income for the whole year is taken into account in each return.

Canada caregiver amount for infirm children under 18 years of age (line 367): Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the duration of the period.

Canada caregiver amount for other infirm dependants age 18 or older (line 307) : Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Make sure that the dependant's net income for the whole year is taken into account in each return.

CPP or QPP contributions (lines 308 and 310): For an employee, the contributions are calculated in each return (pre and post-bankruptcy) based on employment income earned in each period. The refund of overpayments is calculated in the post-bankruptcy return, if applicable. For a self-employed worker, the CPP contribution is generally calculated in the post-bankruptcy return, based on income subject to this contribution for the whole year.

CPP - Recognition of pre-bankruptcy liability: Liability for CPP contributions for self employment income occurs at the end of the calendar year. In the case of a bankruptcy, the CRA is prepared to consider the CPP liability as being a liability that forms part of the bankrupt’s estate where the bankrupt is still in bankruptcy at year end.

Administratively, the CRA does not automatically recognize the pre-bankruptcy CPP liability, which would be the automatic application of the Robert Steel decision. The Steel decision has been accepted in situations where a client is still bankrupt at the time the CPP liability arises (December 31 of the year of bankruptcy) and a request is made to consider pre-bankruptcy CPP liability as being a liability applicable to that period. Therefore, CPP contributions payable for self-employment earnings reported for the pre-bankruptcy period can be included on the pre-bankruptcy return. Since this amount cannot be accurately determined until the post-bankruptcy self-employment earnings are known, a calculation of the CPP payable on the pre-bankruptcy self-employment earnings will not be done prior to the assessment of the post-bankruptcy return.

Neither the software nor the CRA systematically apply this administrative policy. In the Schedule 8 of the software, a check box allows the taxpayer to elect to pay CPP contributions on a pre-bankruptcy return. However, a note should also be attached to the return requesting that the policy be applied, recognizing the existence of CPP obligations in the pre-bankruptcy return.

QPP contributions of a self-employed worker

The QPP contribution of a self-employed worker is calculated in each of the pre and post bankruptcy returns, based on income subject to this contribution for each of the periods. However, on line 21 of the TP1 return, a box allows you to elect to calculate this contribution in the post-bankruptcy return only, based on the income subject to this contribution in the calendar year.

If you are preparing a pre-bankruptcy return, enter the amount of CPP or QPP contributions made starting on the date of bankruptcy for purposes of calculating the amounts transferred from the spouse on Schedule 2. If you are preparing a post-bankruptcy return, enter, where appropriate, the CPP or QPP pensionable earnings (from employment or self-employment) before the bankruptcy and the contributions made before the bankruptcy, in order for the program to correctly calculate the amount of the credit and, where applicable, any overpayment amount.

E.I. premiums (line 312): The credit is calculated in each return (pre and post-bankruptcy) by reference to the premiums paid during the period; in the case of an overpayment, the refund is claimed in the post-bankruptcy return. If you are filing a pre-bankruptcy return, enter E.I. premiums paid after the date of the bankruptcy for purpose of calculating the amounts transferred from spouse on Schedule 2. If you are filing a post-bankruptcy return, enter, where requested, E.I. insurable earnings for the pre-bankruptcy period and E.I. premiums paid in that same period, so the program will correctly calculate the amount of the credit as well as any overpayment.

E.I. premiums on self-employment and other eligible earnings (line 317): The credit is calculated in each return (pre and post-bankruptcy) by reference to the premiums paid and the net self-employment income earned during the period; in the case of an overpayment, the refund is claimed in the post-bankruptcy return. If you are filing a pre-bankruptcy return, enter E.I. premiums paid and the insurable earnings from self-employment income after the date of the bankruptcy for purpose of calculating the amounts transferred from spouse on Schedule 2. If you are filing a post-bankruptcy return, enter, where requested, E.I. insurable earnings from self-employment income for the pre-bankruptcy period and E.I. premiums paid in that same period, so the program will correctly calculate the amount of the credit as well as any overpayment.

Provincial Parental Insurance Plan (PPIP) premiums (lines 375 to 378): Is calculated in each return (pre and post-bankruptcy), by reference to the premiums paid in the period. If you are filing a pre-bankruptcy return, enter the premiums paid after the date of the bankruptcy for purpose of calculating the amounts transferred to spouse on Schedule 2. As well, enter the amount of insurable earnings for the period from the date of bankruptcy. This amount is used to determine whether the taxpayer is subject to the PPIP for the pre-bankruptcy period. If you are filing a post-bankruptcy return, enter earnings eligible for PPIP for the pre-bankruptcy period as well as the premiums paid before the bankruptcy in order for the program to correctly establish the credit amount.

Volunteer firefighters’ amount (line 362): The entire amount of the volunteer firefighters’ amount can be claimed either in the pre-bankruptcy return or the post-bankruptcy return, but not in both.

Canada employment amount (line 363): Is calculated in each return (pre and post-bankruptcy), by reference to employment amount of the period. However, the total amount claimed for the calendar year cannot exceed the amount that would have been claimed if the taxpayer had not declared bankruptcy.

Home accessibility expenses (line 398): This credit can be claimed in each return (pre and post-bankruptcy), by reference to the amounts paid in each period. However, the total amount claimed for the calendar year cannot exceed the amount that would have been claimed if the taxpayer had not declared bankruptcy.

Pension income amount (line 314): Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the amounts received in each period. Where you are filing a return either for the pre or post-bankruptcy period, make sure that the taxpayer's eligible income for the pension amount of the other period is entered on the appropriate cell.

Disability amount (line 316): Is prorated between pre and post-bankruptcy returns based on the number of days in each period. Where the taxpayer is eligible, select the Disability amount check box on the Identification form. The program then prorates the amount taking into account the date of the bankruptcy.

Disability amount transferred from a dependant (line 318): Is calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Make sure that the dependant's net income for the whole year is taken into account in each return.

Tuition and education amounts (line 323): This credit may be claimed in each return (pre or post-bankruptcy) based respectively on the tuition fees paid in the period and on the number of eligible months in the period.

Tuition amounts transferred from a child (line 324): This credit may be prorated in each return (pre or post-bankruptcy) in proportion to the duration of the period. You should indicate in the Profile for each child, the tuition fees and education amount relating to the entire year.

Amounts transferred from spouse or common-law partner (line 326): The amounts eligible for transfer are calculated on a calendar year basis and the result is prorated between pre and post-bankruptcy returns based on the number of days in each period. Where amounts are transferred from one spouse to the other, fill in the Amounts transferred to spouse workchart, which is accessible by pressing F9.

Medical expenses (line 332): This credit may be claimed in each return (pre or post-bankruptcy) based on medical expenses paid in each period. The net income used for the calculation corresponds to the net income reported on line 236 of the return relating to the same period.

Donations and gifts (line 349): This credit may be claimed in each return (pre or post-bankruptcy) based on donations made in each period. Donations from prior years can be subject to a credit in the pre-bankruptcy return (see the trustee’s return below). The net income used for the calculation (limit of 75% of the net income) corresponds to the net income reported on line 236 of the return relating to the period covered by donations.

Investment tax credit (line 412): This credit is available as usual in the pre-bankruptcy return, but it cannot be claimed in the post-bankruptcy return. It may however be claimed in the trustee's return (see below).

Canada Child Benefit (CCB): The program only calculates the CCB in the post-bankruptcy return taking into account the net income and the Universal Child Care Benefit (UCCB) for the entire year. Where appropriate, enter the net income and the UCCB amount relating to the pre-bankruptcy period.

Contribution to the Health Services Fund (Québec): Is calculated in the post-bankruptcy return based on income of the whole year. Enter, where required, all income of the pre-bankruptcy period which is subject to such contribution.

GST tax credit: Is calculated in the post-bankruptcy return based on net income and UCCB amounts and benefits for the whole year. Make sure that pre-bankruptcy net income is entered where required.

RRSP/PRPP Contributions: Since the earned income limit is calculated on a calendar year basis, you have to reduce the RRSP maximum deductible in the post-bankruptcy return by any deduction claimed in the pre-bankruptcy return.

Minimum tax carry-over (Schedule 1, line 427): Is not deductible in the post-bankruptcy return. It may, however, be claimed in the trustee's return (see below).

Where a taxpayer becomes bankrupt, the trustee must file a return in which all income arising from dealings in the estate of the bankrupt or from acts performed while carrying on the business of the bankrupt has to be reported.

For purposes of this return, Division C deductions cannot be claimed except the following:

• deduction for stock options and for shares (line 249), insofar as it relates to an amount included in the trustee's return;
• deduction for capital gains (line 254), insofar as it relates to an amount included in the trustee's return;
• carry-over losses (lines 251, 252 and 253), as long as the losses have been incurred in a taxation year which ends before the taxpayer is discharged absolutely from bankruptcy.

As for tax credits, the trustee may only claim the following:

• the amount for charitable donations (line 349), which is available even in respect of donations made before the day of the bankruptcy;
• the amount for CPP or QPP contributions (line 310), in respect of income subject to such contributions which is entered in the trustee's return.

The trustee may also claim the investment tax credit (line 412) as long as it does not relate to an expenditure made or a property acquired during a taxation year which ends after the taxpayer is discharged absolutely from bankruptcy.

The trustee may also deduct minimum tax carry-over (Schedule 1, line 427).

Remember that error diagnostics will appear if you make an inappropriate claim.

For taxation years ending after the taxpayer was discharged absolutely from bankruptcy, the following points are to be considered:

• no amount shall be deducted in respect of carry-over losses incurred in a taxation year ending before the discharge;
• no deduction shall be claimed as minimum tax carry-over in respect of an amount for any taxation year ending before the discharge;
• no amount shall be deducted in respect of a gift made in any taxation year ending before the discharge;
• the investment tax credit shall not be claimed in respect of an expenditure incurred or a property acquired by the taxpayer in any taxation year ending before the discharge.