Bankruptcy is a legal process governed by the Bankruptcy and Insolvency Act in Canada. It offers individuals who are overwhelmed by debt a pathway to financial relief and a fresh start.

Initiating Bankruptcy

1. Voluntary Assignment: In this scenario, individuals who are insolvent willingly make an assignment of all their assets for the benefit of all their creditors. This is a proactive step taken by the debtor to address their financial situation.
2. Involuntary Assignment: Sometimes, a creditor may file a petition in a provincial court for a receiving order against the debtor’s assets. This is known as being petitioned into bankruptcy and occurs when creditors take legal action against the debtor.
3. Deemed Bankruptcy: This occurs when a debtor, who has initiated the insolvency process, fails to meet the requirements for filing a Division I proposal in bankruptcy under the Bankruptcy and Insolvency Act, or does not adhere to the provisions provided within the proposal after it has been accepted by the creditors/court.

Rights of the Bankrupt

Despite bankruptcy, individuals retain certain rights, particularly the right to earn a living. This means that bankrupt individuals are allowed to engage in or continue taxable business activities outside of the bankruptcy estate. However, they must comply with certain regulations and restrictions outlined in bankruptcy laws.

Responsibilities of the Trustee

The trustee in bankruptcy plays a crucial role in managing the bankruptcy process. They act as the agent of the bankrupt individual and have several responsibilities, including handling Canada Pension Plan (CPP) and Employment Insurance (EI) contributions.

If the trustee continues the bankrupt employer’s business, they must obtain a new business number and ensure that CPP contributions, EI premiums, and income tax deductions are handled according to the bankrupt employer’s remittance schedule.

Tax Implications

Payments made by the trustee to settle claims for unpaid wages are taxed as “other income.” This means that these payments do not require CPP, EI, and income tax withholdings. Instead, the trustee must report these payments on a T4A information return.

Bankruptcy provides individuals with a legal process to discharge most of their debts, offering them a fresh start. However, it also comes with specific obligations and responsibilities for both the bankrupt individual and the trustee overseeing the process. Understanding these aspects is essential for navigating the bankruptcy process effectively.