Bankruptcy
Bankruptcy is a legal process by which you may be discharged from most of your debts. Its purpose is to permit an honest, but unfortunate debtor to obtain a discharge from most debts, subject to reasonable conditions.
There are three different ways to go into bankruptcy:
- voluntary assignment, where insolvent persons make an assignment of all their assets for the general benefit of all creditors
- involuntary assignment, when a creditor files a petition in a provincial court for a receiving order against the debtor's assets, known as being petitioned into bankruptcy
- deemed bankruptcy, when a debtor, who has started the insolvency process, has failed to meet the requirements for filing a Division I proposal in bankruptcy under the Bankruptcy and Insolvency Act or has failed to adhere to the provisions provided within the proposal after it has been filed and accepted by the creditors/court
You or your representative (trustee/administrator) may have to send a copy of the court-issued assignment in bankruptcy, a bankruptcy notice, or a document titled First meeting of creditors to your Insolvency Intake Centres.
Usually, the business number (BN) of a bankrupt client will be closed after discharge.
Rights of a bankrupt
The bankrupt has the right to earn a living. For this purpose, the bankrupt is allowed to engage in or continue a taxable business activity outside the estate, after a bankruptcy.
For more information on how bankruptcy will affect your business, go to Bankruptcy – Business structures.
Responsibilities of the trustee in bankruptcy
Under the Canada Pension Plan (CPP) and the Employment Insurance Act, the trustee in bankruptcy is the agent of the bankrupt employer in the event of an employer's liquidation, assignment, or bankruptcy.
If a bankrupt employer has deducted CPP contributions, employment insurance (EI) premiums, or income tax from amounts employees received before the bankruptcy but has not remitted these amounts to the Canada Revenue Agency, the trustee must hold the amounts in trust. These amounts are not part of the estate in bankruptcy and should be kept separate.
If a trustee continues to operate the bankrupt employer's business, the trustee must get a new BN. The trustee has to continue to deduct and remit the necessary CPP contributions, EI premiums, and income tax according to the bankrupt employer's remittance schedule.
The trustee should prepare and file T4 information returns (slips) in the usual way.
Note
The amounts that a trustee pays to employees of a bankrupt corporation to settle claims for wages that the bankrupt employer did not pay are taxed as "other income." This income does not require CPP, EI, and income tax withholdings. The trustee has to report these payments on a T4A information return. For details, see Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary.