Can You File Bankruptcy on CRA Tax Debt? Income Tax, GST, Payroll Rules

Personal income tax debt is 100% dischargeable in bankruptcy regardless of how old the debt is, including penalties and interest—filing immediately stops CRA garnishment and account freezes. GST/HST remittance debt from self-employment is also dischargeable, but payroll source deductions (CPP, EI, withheld income tax) are NOT dischargeable because they are trust funds.

The Canada Revenue Agency is one of the most aggressive collectors in Canada with powers exceeding private creditors. CRA can garnish wages without court orders, freeze bank accounts instantly, and seize assets including vehicles and property. With Canada’s 2026 financial crisis driving more people into tax debt, CRA collection activity has intensified. Bankruptcy provides immediate legal protection through the stay of proceedings that forces CRA to stop all collection activities within 24 to 48 hours.

Which CRA debts are dischargeable in bankruptcy?

Most CRA debts are dischargeable as unsecured debts, but critical exceptions exist for trust funds and specific circumstances. Understanding which debts are eliminated versus which survive bankruptcy prevents unpleasant surprises after discharge.

Personal income tax is the most common CRA debt in bankruptcy. Whether you owe $5,000 or $500,000 in personal income tax, bankruptcy eliminates 100% of the debt including all penalties and interest. Tax debt age does not matter—10-year-old tax debt discharges the same as current-year debt.

Self-employed individuals who failed to remit collected GST or HST can discharge this debt in bankruptcy. If you operated a business, collected $50,000 in GST from customers, and failed to remit it to CRA, this $50,000 is dischargeable unsecured debt. CRA may argue these are trust funds, but courts generally find self-employed GST debt is personal obligation, not trust funds.

Payroll source deductions are the major exception. If you were an employer and withheld CPP, EI, and income tax from employee paychecks but failed to remit these amounts to CRA, you remain personally liable after bankruptcy. Section 227.1 of the Income Tax Act imposes personal liability on directors and officers for unremitted source deductions. These are trust funds—money that never belonged to you.

The distinction between self-employed GST and employer source deductions is critical. Self-employed people are collecting GST as part of their business revenue—it mingles with business income. Employers are withholding source deductions in trust and must keep them separate from operating funds. Courts treat trust funds differently from business debts.

Corporate tax debt survives personal bankruptcy because corporations are separate legal entities. If your corporation owes CRA $100,000 in corporate income tax, your personal bankruptcy does not eliminate this debt. The corporation remains liable. However, if you are personally liable for corporate debt through director liability or personal guarantees, those personal liability amounts may be dischargeable.

CERB and CEWS overpayments are generally dischargeable unless obtained through fraud. If CRA claims you received CERB or wage subsidy payments you were not entitled to, these are treated as unsecured debts and discharged in bankruptcy. If CRA proves you committed fraud to obtain benefits, Section 178(1)(d) of the BIA prevents discharge of debts arising from fraud.

Student loan debt is not CRA debt but often confuses people with tax debt. Student loans are issued by federal or provincial governments but are not administered by CRA. Student loans less than 7 years from end of studies are not dischargeable. After 7 years, student loans can be discharged in bankruptcy the same as other unsecured debts.

What is Section 172.1 for high income tax debt?

Section 172.1 of the Bankruptcy and Insolvency Act imposes special rules when income tax debt exceeds $200,000 and represents 75% or more of total unsecured claims. This provision prevents high-income earners from strategically using bankruptcy to avoid large tax bills while protecting other assets.

The $200,000 threshold applies to income tax only—not total debt. If you owe $250,000 in income tax and $50,000 in credit cards, your total unsecured debt is $300,000 but only the $250,000 income tax counts for Section 172.1 purposes. You meet the $200,000 threshold.

The 75% test divides income tax debt by total unsecured debt. Using the example above, $250,000 income tax divided by $300,000 total debt equals 83%—well above the 75% threshold. Section 172.1 applies. If you owed $250,000 income tax but $500,000 in credit cards and loans ($750,000 total), income tax is only 33% of total debt and Section 172.1 does not apply.

When Section 172.1 applies, automatic discharge is not available at 9 months for first-time bankrupts. Minimum discharge timeline is 21 months regardless of whether you have surplus income. This extended timeline cannot be shortened—even if you have no surplus income and want to discharge at 9 months, Section 172.1 forces 21-month minimum.

The court may order conditional discharge requiring 25% repayment of tax debt. If you owe $300,000 in income tax and Section 172.1 applies, the court can condition your discharge on paying $75,000 (25% of $300,000) to CRA. This payment is in addition to regular bankruptcy costs including surplus income and trustee fees.

Court discretion determines whether the 25% repayment is required. Judges consider factors including how the tax debt arose, your income and asset situation, whether you attempted to pay taxes, and whether bankruptcy appears to be strategic avoidance. High-income professionals who simply did not pay taxes for multiple years often face the 25% payment condition. People who genuinely fell behind due to business failure or income loss may not.

The 25% repayment must be completed before discharge is granted. If the court orders $75,000 repayment, you must pay this amount during bankruptcy—typically over the 21-month minimum period or longer. Monthly payments would be approximately $3,571 over 21 months. This is separate from and in addition to surplus income payments if applicable.

Section 172.1 adds significant cost to high tax debt bankruptcies. A person with $300,000 tax debt may face $75,000 in conditional discharge payments plus $42,000 in surplus income payments (if earning $80,000 annually) plus $2,000 in trustee fees, totaling $119,000 over 21 to 36 months. At this cost level, consumer proposals often offer better terms. For all CRA options and the filing process, see CRA debt relief options and how to file bankruptcy.

CRA automatically flags bankruptcies meeting Section 172.1 criteria. The trustee must notify CRA when Section 172.1 applies, and CRA typically opposes automatic discharge. A court hearing is scheduled to determine conditions. You may need legal representation at this hearing, adding $2,000 to $5,000 in legal costs.

Avoiding Section 172.1 requires reducing total tax debt below $200,000 or increasing non-tax debt above 25% of total. Some people pre-bankruptcy borrow additional funds to dilute the tax debt percentage—for example, borrowing $300,000 against home equity to reduce tax debt from 83% to 50% of total debt. This strategy is risky and may be challenged as fraudulent preference.

Consumer proposals do not trigger Section 172.1 even for high tax debt. If you owe $300,000 in income tax, filing a consumer proposal avoids the 21-month minimum and 25% repayment conditions. Proposals negotiate settlements based on your ability to pay—often 20% to 40% of debt over 5 years. For high tax debt, proposals provide better outcomes than bankruptcy in most cases.

Does bankruptcy stop CRA garnishment and collection?

Filing bankruptcy triggers an automatic stay of proceedings under Section 69.3 of the Bankruptcy and Insolvency Act. The stay immediately stops all CRA collection actions including wage garnishment, bank account freezes, Requirements to Pay issued to third parties, asset seizure attempts, and collection calls.

Wage garnishment stops within one to two pay periods after filing. Your Licensed Insolvency Trustee notifies CRA and your employer immediately upon filing bankruptcy. CRA is legally required to release garnishment orders within 24 to 48 hours of receiving bankruptcy notice. Your employer processes the release within the next pay period—typically resulting in one or two more garnished paychecks before garnishment fully stops.

Bank account freezes are released within 48 to 72 hours. CRA frequently freezes bank accounts when taxpayers owe significant arrears. The freeze prevents you from accessing funds in your account. Once your trustee notifies CRA of bankruptcy filing, CRA must release the freeze. Most banks process the release within 2 to 3 business days. Funds in the account at the time of bankruptcy filing may be claimed by the trustee as an asset.

Requirements to Pay are cancelled immediately. CRA issues Requirements to Pay to third parties who owe you money—employers, clients, contract payers, investment account holders. These orders direct the third party to pay CRA instead of paying you. Bankruptcy automatically cancels all outstanding Requirements to Pay, and CRA cannot issue new ones during your bankruptcy.

Collection calls and letters stop within 24 hours of CRA receiving bankruptcy notice. The trustee notifies CRA electronically and by mail immediately upon filing. CRA systems flag your file as “in bankruptcy” and automatic dialer systems remove your number from call queues. Some automated letters may be sent during the 24 to 48 hour update period, but manual collection stops immediately.

The stay of proceedings remains in effect throughout your bankruptcy until discharge. For a 9-month first-time bankruptcy, CRA cannot resume any collection actions for 9 months. For a 21-month bankruptcy with surplus income, the stay lasts 21 months. If your bankruptcy is annulled or abandoned, the stay lifts and CRA can resume collection immediately.

Property liens and asset seizures are frozen but not eliminated. If CRA registered a lien against your property before you filed bankruptcy, the lien remains registered but cannot be enforced during bankruptcy. CRA cannot force sale of the property while you are bankrupt. After discharge, the lien is typically eliminated along with the underlying tax debt, and you can apply to remove the lien from property titles.

Secured debts and trust obligations are not stayed. If CRA has a secured claim—rare but possible in specific circumstances—the stay does not prevent enforcement. Trust fund debts like unremitted payroll source deductions are not stayed and CRA can continue collection on these amounts even during bankruptcy.

Child support and spousal support obligations continue despite bankruptcy. If CRA is garnishing wages for child support arrears, this garnishment continues during bankruptcy. Family support obligations are not stayed by bankruptcy proceedings. The discharge also does not eliminate support arrears—these survive bankruptcy.

Post-bankruptcy tax obligations are not affected by the stay. If you file 2025 taxes while bankrupt in 2026 and owe $5,000 for 2025, this is a post-bankruptcy debt not subject to the stay. CRA can immediately collect post-bankruptcy tax debts through normal collection processes. Only pre-bankruptcy tax debts benefit from the stay and discharge.

Strategic timing of bankruptcy filing maximizes garnishment protection. If CRA notifies you of pending garnishment, filing bankruptcy before the garnishment starts prevents any wage garnishment. If garnishment has already started, filing bankruptcy stops it within 1 to 2 pay periods. Some people delay filing until CRA begins aggressive collection to maximize the immediate relief benefit.

What happens to tax refunds in bankruptcy?

Tax refunds for the year of bankruptcy and all prior years belong to the bankruptcy estate and are paid to your trustee. Tax refunds for years after your discharge year belong to you. This split creates planning opportunities and potential pitfalls depending on filing timing.

Calculate the split year pro-rata based on your filing date. If you file bankruptcy on April 15, 2026, approximately 28% of the year (105 days out of 365) occurred before bankruptcy. When you file your 2026 taxes in early 2027, the trustee is entitled to 28% of any refund and you keep 72%. The exact calculation uses days before bankruptcy divided by 365.

All prior year refunds belong to the trustee without proration. If you file bankruptcy in April 2026, your 2025, 2024, 2023, and all earlier refunds go entirely to the trustee. If you have not yet filed tax returns for these years, you must file them during bankruptcy and any refunds are paid to the trustee. Many people discover they would have received substantial refunds if they had filed before bankruptcy—these are lost to the estate.

Maximize refund retention by filing bankruptcy early in the year. If you file bankruptcy on January 5, 2026, only 1.4% of 2026 (5 days out of 365) is pre-bankruptcy. Your 2026 refund filed in early 2027 is 98.6% yours and only 1.4% the trustee’s. People with consistent tax refunds should file bankruptcy in January or early February when possible.

GST/HST credits and Canada Child Benefit payments follow different rules than income tax refunds. GST credits are prorated monthly—if you are bankrupt for 6 months of a year, 6 months of GST credits go to the trustee. Canada Child Benefit payments received during bankruptcy typically go to the trustee if you have surplus income, but rules vary by trustee and province. These benefit payments can total $3,000 to $6,000 annually for families.

File all outstanding tax returns before bankruptcy to capture refunds. If you have not filed 2023 and 2024 tax returns and expect refunds, file them immediately before bankruptcy and receive the refunds. Once bankruptcy is filed, the trustee controls all prior-year refunds. Many people lose $5,000 to $15,000 in refunds by failing to file returns pre-bankruptcy.

The trustee uses refunds to pay bankruptcy costs first, then creditors. If your 2024 tax refund is $4,000 and trustee fees are $2,000, the trustee deducts $2,000 for fees and distributes $2,000 to creditors. You receive nothing. This is standard bankruptcy administration—refunds are assets of the estate used to satisfy bankruptcy obligations.

CRA offsets pre-bankruptcy refunds against pre-bankruptcy tax debts automatically. If you owe $10,000 in 2023 taxes but have a $3,000 refund for 2024, CRA applies the $3,000 refund to the $10,000 arrears before bankruptcy. The trustee receives nothing because CRA already offset. This reduces CRA’s claim in your bankruptcy by $3,000.

Post-discharge refunds are fully yours. If you file bankruptcy in April 2026 and discharge in January 2027, your 2027 tax refund filed in early 2028 belongs entirely to you. The trustee has no claim. Plan major deductions and credits for post-discharge years to maximize refunds you keep.

RRSP withdrawal strategies interact with tax refund timing. If you must withdraw RRSP funds to pay non-exempt equity during bankruptcy, the withholding tax on the withdrawal generates a tax liability. If the withdrawal occurs in the bankruptcy year, part of any refund offsetting this liability goes to the trustee. Time RRSP withdrawals for the year after discharge when possible.

Can I negotiate a payment plan with CRA instead of bankruptcy?

CRA offers payment arrangements for taxpayers who can afford monthly payments but cannot pay arrears in full immediately. Payment plans typically spread debt over 12 to 24 months, though longer arrangements are sometimes approved. Interest continues accruing at CRA’s prescribed rate during payment plans—currently approximately 10% annually.

Payment plan approval depends on your ability to pay and compliance history. CRA requires full financial disclosure including income, expenses, assets, and other debts. You must be current on all tax filings—CRA will not approve payment plans if you have unfiled returns. Most payment plans require that you stay current on current-year taxes while paying arrears.

Typical payment plan terms include monthly payments of 5% to 10% of total arrears. If you owe $40,000, CRA may require $2,000 to $4,000 monthly payments. These amounts exceed what most debtors can afford, making payment plans impractical for large tax debts. For debts under $10,000, payment plans work well if income supports the required payments.

Interest continues accumulating during payment plans. The CRA prescribed rate is set quarterly and compounds daily. On a $30,000 balance at 10% annual interest, you accrue approximately $250 monthly in interest. If your payment plan is only $300 monthly, only $50 applies to principal. Paying off $30,000 at $300 monthly would take over 15 years due to compounding interest.

CRA can cancel payment arrangements if you miss payments or fall behind on current taxes. One missed payment typically triggers immediate cancellation. CRA then resumes full collection activities including garnishment and account freezes. The payment arrangement provides no legal protection—it is purely an administrative accommodation that CRA can revoke at will.

Compare payment plan total cost to bankruptcy or consumer proposal costs. A $40,000 tax debt on a 24-month payment plan at 10% interest costs approximately $48,000 total ($40,000 principal plus $8,000 interest). Bankruptcy might cost $12,000 total if you have moderate surplus income and the debt is discharged. Consumer proposal might cost $12,000 to $16,000 at 30% to 40% settlement.

Payment plans make sense for small tax debts under $10,000 when you can afford 10% to 15% of debt monthly and want to avoid bankruptcy’s credit impact. For larger debts over $25,000, payment plans rarely make financial sense compared to bankruptcy or proposals due to ongoing interest and total cost.

Bankruptcy provides immediate legal protection that payment plans do not. If CRA has issued Requirements to Pay or is garnishing wages, a payment plan does not stop these collection actions immediately. CRA may agree to release garnishment as part of payment plan negotiations, but this is discretionary. Bankruptcy automatically stops all collection within 24 to 48 hours by law.

Some people use payment plans as a temporary measure while preparing for bankruptcy or proposals. If you need 2 to 3 months to organize finances, consult trustees, and gather documents, a short-term payment plan prevents immediate garnishment. Then file bankruptcy or proposal once prepared. This strategy works if you can make payments for the short preparation period.

The voluntary disclosures program offers penalty relief but does not eliminate interest or principal. If you failed to file tax returns for multiple years, the voluntary disclosures program allows you to file late returns with penalties waived. You still owe full principal plus interest. This program helps people with large penalties but does not significantly reduce total debt.

How does a consumer proposal treat CRA debt?

Consumer proposals treat CRA tax debt identically to other unsecured debts—CRA votes on your proposal like any other creditor and is bound by the outcome if creditors holding 50% plus one dollar by value accept. CRA has no special status or veto power in consumer proposal proceedings despite being a government creditor.

CRA accepts most consumer proposals when the offer exceeds bankruptcy recovery. Trustees calculate what CRA would receive if you filed bankruptcy—typically zero to 15% of debt after trustee fees and provincial exemptions consume most receipts. Proposals offering 25% to 40% of debt provide better recovery than bankruptcy, making acceptance likely.

Filing a consumer proposal stops CRA collection immediately through the same stay of proceedings that applies in bankruptcy. Wage garnishment stops within one to two pay periods. Bank account freezes are released within 48 to 72 hours. Requirements to Pay are cancelled. The stay remains in effect throughout your proposal term—up to 5 years—as long as payments remain current.

Proposals protect assets that bankruptcy would force you to surrender. If you have $40,000 in home equity and owe $60,000 to CRA, bankruptcy in Ontario requires paying $29,217 (equity minus $10,783 exemption) to keep your home. A consumer proposal protects the full $40,000 equity while settling the $60,000 CRA debt for perhaps $18,000 to $24,000 over 5 years.

Fixed proposal payments never increase regardless of income changes. If you negotiate a $400 monthly proposal payment and later receive a $20,000 raise, your payment stays $400. In bankruptcy, the $20,000 raise triggers higher surplus income calculations and potential timeline extensions. This stability makes proposals attractive for people expecting income growth or variable income.

CRA typically responds to proposals within 45 days. The trustee files your proposal and sends it to all creditors including CRA. Creditors have 45 days to request a creditor meeting or file objections. If no creditor requests a meeting within 45 days, the proposal is deemed accepted. CRA rarely requests meetings unless the proposal offers substantially less than bankruptcy recovery or appears unrealistic. Use the CRA debt calculator to estimate your specific settlement terms.

CRA may request financial disclosure beyond standard proposal documents. As a sophisticated creditor, CRA sometimes asks for additional income verification, asset details, or explanations of income sources. Your trustee handles these requests and negotiates with CRA on your behalf. Providing requested information quickly increases acceptance likelihood.

Proposals can be amended if CRA objects to the initial offer. If CRA votes against your proposal claiming the offer is too low, your trustee can amend the proposal to increase the payment amount or extend the term. Amended proposals require creditor re-voting. Most proposal amendments are accepted when they address creditor concerns about recovery amounts.

Section 172.1 does not apply to consumer proposals. Even if you owe $300,000 in income tax representing 90% of total debt, proposals avoid the 21-month minimum and 25% payment conditions of Section 172.1. Proposals are negotiated based on your assets and income without special penalties for high tax debt. This makes proposals strongly preferred over bankruptcy for large CRA debts.

Proposal costs for CRA debt depend on your total debt and income. If you owe $80,000 to CRA and have $50,000 annual income with $30,000 home equity, a typical proposal might offer 30% ($24,000) paid over 5 years at $400 monthly. Including trustee fees, total cost is approximately $27,000. Compare this to bankruptcy with $10,500 surplus income plus $2,000 fees plus $19,217 home equity buyout, totaling $31,717—proposals save $4,717.

The consumer proposal calculator estimates your specific proposal terms and compares costs to bankruptcy. Input your CRA debt amount, other debts, income, and assets to see personalized payment estimates and recovery percentages creditors would receive.

What if my CRA debt is from CERB or CEWS overpayment?

CERB and CEWS overpayments are treated as general unsecured debts and are dischargeable in both bankruptcy and consumer proposals. If CRA claims you were not eligible for COVID-19 emergency benefits you received, these overpayment demands are eliminated through insolvency proceedings.

CRA issued millions of CERB overpayment letters in 2021 through 2025. Many recipients genuinely believed they qualified based on government communications but later discovered they did not meet technical eligibility requirements. Others knowingly claimed benefits while ineligible. Both situations create CRA debts that can be discharged in bankruptcy or proposals.

CERB overpayments range from $2,000 to $28,000 depending on how many periods you claimed. The maximum CERB benefit was $2,000 per 4-week period for up to 7 periods, totaling $14,000. If you claimed the maximum and CRA determines you were fully ineligible, the overpayment demand is $14,000. Some people claimed CERB and provincial benefits simultaneously, creating combined overpayments exceeding $28,000. For detailed strategies on handling CERB repayment demands, see CERB debt and CRA garnishment options.

CEWS overpayments for businesses can reach hundreds of thousands of dollars. If your corporation claimed Canada Emergency Wage Subsidy and CRA later determines the claims were excessive or fraudulent, overpayment demands are issued to the corporation. Director liability may extend to corporate CEWS debt, making it personally dischargeable if director liability is established.

Fraud allegations complicate CERB discharge. Section 178(1)(d) of the BIA states that debts obtained by fraud are not discharged. If CRA proves you intentionally misrepresented your situation to claim CERB knowing you were ineligible, this may constitute fraud. Most trustees and courts find genuine eligibility mistakes—even if wrong—do not constitute fraud sufficient to prevent discharge.

The burden of proof for fraud is on CRA. CRA must prove intentional deception, not mere negligence or misunderstanding. Applying for CERB based on government advertising and eligibility checkers, even if you ultimately did not qualify, typically is not fraud. Claiming CERB while working full-time with documented pay stubs showing ineligibility may be fraud.

CERB debt discharge does not require repaying fraud-based amounts in most cases. Unlike Section 172.1 for tax debt over $200,000, CERB debt has no special repayment provisions. If your CERB debt is $14,000 and you file bankruptcy, it is discharged along with other unsecured debts unless CRA successfully proves fraud and opposes your discharge in court.

Consumer proposals settle CERB debt at typical proposal rates of 60% to 80% reduction. If you owe $14,000 CERB debt plus $40,000 in credit cards and loans ($54,000 total), a proposal at 30% settles all debts for $16,200 over 5 years. CRA receives its proportional share—approximately $4,200 of the $14,000 CERB debt—and the remaining $9,800 is eliminated.

CRA aggressively pursues CERB overpayments through garnishment and offsets. If you owe CERB debt and receive tax refunds or GST credits, CRA automatically offsets these benefits against CERB arrears. If you owe $14,000 CERB and have a $3,000 tax refund, CRA takes the full $3,000 and you receive nothing. Filing bankruptcy or proposal stops these offsets immediately.

Negotiate with CRA before filing insolvency if CERB debt is your only significant debt. If you owe $10,000 CERB and have no other debts, filing bankruptcy for a single $10,000 debt may not make sense. CRA sometimes accepts payment plans or reduced settlements for CERB debt outside formal insolvency—typically 50% to 75% of the amount. This avoids credit damage from R9 or R7 ratings.

Bottom Line

Personal income tax debt, penalties, and interest are fully dischargeable in bankruptcy regardless of age, and filing immediately stops CRA wage garnishment and bank freezes within 24 to 48 hours through the automatic stay of proceedings—but payroll source deductions that employers withheld from employee paychecks survive bankruptcy as trust funds under Section 227.1 of the Income Tax Act. GST and HST remittance debt from self-employment is dischargeable, CERB and CEWS overpayments are dischargeable unless obtained through proven fraud, and most CRA debts are eliminated except the critical exceptions of trust funds and corporate tax debt. Section 172.1 imposes special rules when you owe $200,000 or more in income tax representing 75% or more of unsecured claims—requiring a 21-month minimum discharge and potentially 25% court-ordered repayment—making consumer proposals the better choice for high tax debt since proposals negotiate 60% to 80% debt reduction with no Section 172.1 penalties, protect 100% of home and vehicle equity, and stop CRA collection immediately with the same legal stay. Tax refunds for the bankruptcy year and all prior years go to the trustee while post-discharge refunds are yours, and CRA accepts most consumer proposals when the offer exceeds bankruptcy recovery, typically settling at 20% to 40% of debt over 5 years with fixed payments that never increase. If you owe CRA $25,000 or more, use the consumer proposal calculator to compare bankruptcy costs including surplus income versus proposal fixed payments for your tax debt.

Disclaimer: This article provides general information about CRA debt in bankruptcy. Tax debt situations vary. Consult with a Licensed Insolvency Trustee for advice specific to your circumstances.

Last updated: February 2, 2026