Bankruptcy Releases a CRA Tax Debt. Four Limits Apply
The Canada Revenue Agency can garnish wages, register a lien against a home and take a refund by set-off. Inside an insolvency, one sentence of the Bankruptcy and Insolvency Act re-ranks the claim all of that is collecting on. Section 86(1): “In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in right of Canada or a province or of any body under an Act respecting workers’ compensation … rank as unsecured claims.” A CRA tax debt becomes an ordinary claim and the Crown an ordinary creditor, standing in line with the credit card.
Our recent coverage has worked through what a CRA balance costs: the late-filing penalty, the prescribed rate on arrears, the ten-year collections clock, and whether borrowing to clear the balance costs less than leaving it with CRA. All of it stops at the same wall, a balance genuinely beyond reach. Past that wall sits a statute. Here is what it releases, what limits that release, and what it does to your accounts.
The Act treats a tax debt as a claim like any other
Two provisions settle it. Under s.121(1), “All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt … shall be deemed to be claims provable in proceedings under this Act.” A tax balance assessed before the filing is a provable claim. Section 86(1), above, then ranks every provable Crown claim as unsecured. There is no special class for tax and no priority for CRA.
So a tax debt becomes one more unsecured claim in a pool, and what that pool paid out is published. The Office of the Superintendent of Bankruptcy’s Annual Report 2025 consolidates every file closed in the year.
Office of the Superintendent of Bankruptcy, Insolvency Statistics in Canada, Annual Report 2025, Table 10, Consolidation of All Files Closed in 2025 (BIA), Canada row. Cents per dollar is our arithmetic on that table.
Discharge releases it, because the list of exceptions leaves it out
Section 178(2) is short: “Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.” Everything turns on subsection (1), which sets out what a discharge does not release. Compressed, that list is:
- (a) a fine, penalty or restitution order, or an order “similar in nature”, “imposed by a court in respect of an offence”, and debts arising out of a recognizance or bail
- (a.1) court-awarded damages for intentionally inflicted bodily harm, sexual assault, or wrongful death resulting from either
- (b) and (c) alimony, alimentary pension, and support or maintenance for a spouse, former spouse, former common-law partner or child living apart from the bankrupt, under a judicial decision or agreement
- (d) a debt arising out of “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”
- (e) a debt from “obtaining property or services by false pretences or fraudulent misrepresentation”
- (f) the dividend a creditor would have received on a provable claim not disclosed to the trustee
- (g) and (g.1) student and apprentice loans, where the bankruptcy came before the person stopped being a student or eligible apprentice or within seven years after; s.178(1.1) lets a court lift that on a good-faith and continuing-hardship test, but only from five years after the day the person ceased to be a full-time or part-time student or an eligible apprentice, which is not five years after the bankruptcy
- (h) interest owed on any amount in (a) to (g.1)
Income tax is not on that list. Neither is GST/HST. The omission is what does the work: a discharge releases every provable claim except the ones named.
Two points of precision. Paragraph (a) reaches an order “imposed by a court in respect of an offence”, so it requires a court, an offence and an order imposed in respect of it. A late-filing penalty is assessed by the agency. Separately, paragraph (e) is live where a refund was obtained by a false return.
For most people s.168.1(1)(a) sets when that release arrives. A first-time bankrupt is automatically discharged “on the expiry of 9 months after the date of bankruptcy unless, in that 9-month period, an opposition to the discharge has been filed or the bankrupt has been required to make payments under section 68 to the estate of the bankrupt”, and in any other case on the expiry of 21 months, unless an opposition is filed before the discharge takes effect. An automatic discharge, s.168.1(5) adds, “is deemed, for all purposes, to be an absolute and immediate order of discharge.”
The four limits on the release
This is the honest half. The Bankruptcy and Insolvency Act sets four limits on that release: two that keep a claim out of the unsecured pool, one that conditions the discharge itself, and one that is not the filer’s debt at all.
| The limit | Provision | What it does |
|---|---|---|
| Personal income tax debt of $200,000 or more that is 75% or more of total unsecured proven claims | BIA s.172.1(1), s.168.1(1), s.172.1(3) | No automatic discharge. A court decides, and must refuse, suspend or attach conditions. |
| A Crown charge registered before the date of the initial bankruptcy event | ITA s.223(11.1); BIA s.87(1), s.87(2) | Deemed a secured claim, outside the unsecured pool, for what was owed at registration plus interest on it, and ranking behind security made effective earlier. |
| Amounts the person deducted or withheld from someone else | ITA s.227(4), (4.1); BIA s.67(3), s.86(3) | Held in a deemed trust and deemed to form no part of the estate. Withheld money, not your own income tax. |
| Anyone else bound on the same debt: a partner, co-obligor, co-signer or surety | BIA s.179; s.66.28(3) | The order releases the bankrupt, not the person standing beside them. |
A personal income tax debt of $200,000 or more
Section 172.1(1) opens: “In the case of a bankrupt who has $200,000 or more of personal income tax debt and whose personal income tax debt represents 75% or more of the bankrupt’s total unsecured proven claims, the hearing of an application for a discharge may not be held before the expiry of” a waiting period. That period is nine months for a first bankruptcy where no payments are required under s.68, 21 months otherwise, 24 or 36 months for a second bankruptcy, and 36 months in any other case. The automatic timetable above does not apply: s.168.1(1) sets it “in respect of an individual bankrupt other than a bankrupt referred to in subsection 172.1(1)”. A court hearing is compulsory.
At that hearing, s.172.1(3) says the court “shall, subject to subsection (4), (a) refuse the discharge; (b) suspend the discharge for any period that the court thinks proper; or (c) require the bankrupt, as a condition of his or her discharge, to perform any acts, pay any moneys, consent to any judgments or comply with any other terms that the court may direct.” An immediate absolute discharge is not among them.
Subsection (4) sets what the court weighs: the circumstances in which the debt was incurred, the efforts made to pay it, the bankrupt’s financial prospects, and “whether the bankrupt made payments in respect of other debts while failing to make reasonable efforts to pay the personal income tax debt”.
Section 172.1(8) draws three boundaries around the $200,000 figure. Personal income tax debt includes “the amount of any interest, penalties or fines imposed under the Income Tax Act or the provincial legislation”, so arrears interest and penalties count toward it. It excludes an amount owed because the person was a director of a corporation and is liable in that capacity. And it takes the amount from “subsection 223(1) of the Income Tax Act without reference to paragraphs (b) to (c)”, which are amounts payable under the Employment Insurance Act and the Canada Pension Plan, so those do not count either.
A Crown charge registered before the filing
Under ITA s.223(2), CRA certifies an unpaid amount in the Federal Court, and under s.223(5) and (6) it files a memorial creating a charge, lien, priority or binding interest on the debtor’s property. Section 223(11.1) says that when such a charge “is registered in accordance with subsection 87(1) of the Bankruptcy and Insolvency Act, it is deemed (a) to be a claim that is secured by a security and that, subject to subsection 87(2) of that Act, ranks as a secured claim under that Act; and (b) to also be a claim referred to in paragraph 86(2)(a) of that Act.” Paragraph 86(2)(a) is the carve-out from s.86(1), so a registered charge escapes the unsecured pool.
Timing decides it. BIA s.87(1) makes a Crown security “valid in relation to a bankruptcy or proposal only if the security is registered under a prescribed system of registration before the date of the initial bankruptcy event”. Section 87(2)(b) limits what it covers: it is “valid only in respect of amounts owing to Her Majesty … at the time of that registration, plus any interest subsequently accruing on those amounts.” Registered first, and only for what was owed then.
Registering does not put the Crown at the front of the queue either. Section 87(2)(a) makes the registered security “subordinate to securities in respect of which all steps necessary to make them effective against other creditors were taken before that registration”, and the tail of ITA s.223(6) says the same of the charge the memorial creates. A mortgage registered before CRA’s memorial keeps its place ahead of the Crown’s charge.
Amounts withheld from someone else
Money deducted at source was never the filer’s. Income Tax Act s.227 deems anyone who deducts or withholds an amount to hold it “separate and apart from the property of the person … in trust for Her Majesty” under subsection (4), and subsection (4.1) extends that trust “Notwithstanding … the Bankruptcy and Insolvency Act”, deeming equivalent property “to form no part of the estate or property of the person from the time the amount was so deducted or withheld”.
BIA s.67(2) would normally strip a statutory deemed trust out of a bankruptcy. Subsection (3) puts it back for exactly these amounts: those deemed held in trust under “subsection 227(4) or (4.1) of the Income Tax Act”, the parallel provisions of the Canada Pension Plan and the Employment Insurance Act, and matching provincial deductions.
Be clear about who this touches. ITA s.224(1.2) is directed at amounts assessed under s.227(10.1), which are withholding obligations: payroll withheld from an employee, or a payment withheld from a non-resident. It is not a person’s own personal income tax, and a reader carrying a $60,000 personal balance is not in this paragraph. The distinction carries into the stays below. An ordinary requirement to pay is a creditor’s remedy, but s.224(1.2) opens “Notwithstanding … the Bankruptcy and Insolvency Act … but subject to subsections 69(1) and 69.1(1) of the Bankruptcy and Insolvency Act”, so it bends to the Division I stays and names no others. BIA s.86(3) points the same way: s.86(1) does not affect ITA s.224(1.2).
A Division I proposal goes further. Unless the Crown consents, s.60(1.1) bars approval of a proposal that does not provide for paying such amounts in full “within six months after court approval of the proposal”. That does not reach a consumer proposal: s.66.4(1) applies all provisions of the Act “except Division I of this Part” to consumer proposals, and s.60 sits in Division I.
One tax does not get this treatment, which sharpens the rest. GST/HST a person collected is also held in a deemed trust, under ETA s.222(1). But s.222(1.1) switches it off: subsection (1) “does not apply, at or after the time a person becomes a bankrupt (within the meaning of the Bankruptcy and Insolvency Act), to any amounts that, before that time, were collected or became collectible by the person as or on account of tax under Division II.” In a bankruptcy, GST/HST collected before the filing loses its trust status and falls back into the ordinary pool, where income tax already sits. Payroll deductions do not. That switch is written for bankruptcy: it operates “at or after the time a person becomes a bankrupt”, and a proposal is a different filing.
Anyone else who was bound on the debt
Section 179 is blunt. An order of discharge “does not release a person who at the time of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly bound or had made a joint contract with the bankrupt, or a person who was surety or in the nature of a surety for the bankrupt.” Section 66.28(3) is the consumer proposal equivalent: acceptance “does not release any person who would not be released under this Act by the discharge of the consumer debtor.” A discharge is personal to the person who filed.
Most consumer filings are proposals, not bankruptcies
A consumer proposal is a different instrument with its own edges, and it is the route most filers take. Section 66.11 draws the first edge: a consumer debtor is an individual who is bankrupt or insolvent “and whose aggregate debts, excluding any debts secured by the individual’s principal residence, are not more than $250,000 or any other prescribed amount”. Above that line the route is a Division I proposal or bankruptcy. A mortgage on a home does not count toward the ceiling. A tax debt does. Section 66.12(5) draws the second: “A consumer proposal must provide that its performance is to be completed within five years.”
Section 66.31(1) sets what ends it, and it opens with a condition. “Unless the court has previously ordered otherwise or unless an amendment to the consumer proposal has previously been filed”, the proposal is deemed annulled on the day the debtor is in default “for an amount that is equal to or more than the amount of three payments” where payments are monthly or more frequent, or three months after a default where they are less frequent. A deemed annulment can also be undone. Under s.66.31(6) and (7) the administrator may notify creditors that the proposal “will be automatically revived 60 days … after the day on which it was deemed to be annulled unless one of them files … a notice of objection to the revival”, and it revives automatically if none is filed. Under s.66.31(9) the administrator may “at any time apply to the court … for an order reviving any consumer proposal of a consumer debtor who is not a bankrupt that was deemed to be annulled”.
What a proposal releases runs off the same list as a discharge. Section 66.28(2) makes an approved consumer proposal binding on creditors in respect of “(a) all unsecured claims”, which is the class s.86(1) put the Crown into, and s.66.28(2.1) adds that it “does not release the consumer debtor from any particular debt or liability referred to in subsection 178(1) unless the consumer proposal explicitly provides for the compromise of that debt or liability and the creditor in relation to that debt or liability voted for the acceptance of the consumer proposal.”
One provision in this piece does not reach a proposal at all, and for a large tax debt it is the one that chooses the route. Section 172.1 is written “In the case of a bankrupt”, and the thing it delays is “the hearing of an application for a discharge”. A consumer proposal has no discharge hearing.
| Consumer proposal | Bankruptcy | |
|---|---|---|
| Who can use it | Aggregate debts, excluding debts secured by the principal residence, of not more than $250,000 (s.66.11) | No ceiling. Above $250,000 the route is a Division I proposal or bankruptcy. |
| How long it runs | Performance completed within five years (s.66.12(5)) | A first-time bankrupt is automatically discharged at 9 months, or 21 where an opposition is filed or s.68 payments are required (s.168.1(1)(a)) |
| Personal income tax debt of $200,000 or more that is 75% of unsecured proven claims | s.172.1 is written for a bankrupt’s discharge hearing and does not speak to a proposal | No automatic discharge, and a compulsory court hearing (s.172.1(1), s.168.1(1)) |
| Paid to creditors in files closed in 2025, our arithmetic on OSB’s Table 10 | 7.02 cents per dollar of liabilities | 3.45 cents per dollar of liabilities |
Both filings run through a Licensed Insolvency Trustee, and the Office of the Superintendent of Bankruptcy is the federal regulator. CRA itself points there. Its own page on debt relief says: “If you feel you are insolvent, or are considering bankruptcy, please refer to:” and links the OSB.
What filing does to collection on day one
On a bankruptcy, s.69.3(1) is the provision that stops the garnishment: “on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.” Subsection (1.1) ends that stay for a creditor on the day the trustee is discharged, and subsection (2) leaves a secured creditor able to realise on its security.
On the filing of a consumer proposal, s.69.2(1) carries the same words, until the proposal or the amendment to it “has been withdrawn, refused, annulled or deemed annulled” or the administrator has been discharged. Deemed annulment is in there, which is the three-payment default above. CRA is a creditor, and an ordinary requirement to pay under ITA s.224(1) is a remedy. Section 69.2(4) leaves secured creditors able to realise, and s.69.2(2) disapplies the stay altogether where a consumer proposal is filed within six months after a previous one for the same debtor. In a Division I proposal, s.69.1(1)(c) stops the Crown exercising its ITA s.224(1.2) rights until the trustee is discharged, six months have elapsed after court approval, or the person becomes bankrupt, and s.69.1(3) terminates that stay on a default in a post-filing remittance of the same kind.
The clock stops too, which matters to anyone treating time as the way out. ITA s.222(8) adds to a limitation period “the number of days on which one or more of the following is the case: … (d) an action that the Minister may otherwise take in respect of the tax debt is restricted or not permitted under any provision of the Bankruptcy and Insolvency Act …”. CRA puts it the same way on How long a debt can be collected by the CRA, which lists “Filing for bankruptcy or making a proposal under the Bankruptcy and Insolvency Act” among the events that extend the period: “The limitation period will pause when we are notified of the event starting. When the event is over, the limitation period restarts where it left off.” Filing stops collection, and it stops the ten-year collections limitation period from running down.
What the Act does to registered accounts
Section 67(1) sets out what does not form part of the estate, and paragraph (b.3) covers retirement money. It is written as an extension of the provincial exemption in paragraph (b): “without restricting the generality of paragraph (b), property in a registered retirement savings plan, a registered retirement income fund or a registered disability savings plan, as those expressions are defined in the Income Tax Act, or in any prescribed plan, other than property contributed to any such plan or fund in the 12 months before the date of bankruptcy,” after which the subsection turns to what the estate does comprise.
The phrase “any prescribed plan” is prescribed by General Rule 59.2, and it prescribes exactly one thing: “A deferred profit sharing plan, as defined in subsection 147(1) of the Income Tax Act, is prescribed for the purpose of paragraph 67(1)(b.3) of the Act.”
So the federal list runs to four accounts: an RRSP, a RRIF, an RDSP and a DPSP, less whatever went in during the twelve months before the date of bankruptcy. A TFSA is not on it. Neither is an FHSA, an RESP or a non-registered account. Whatever protection those have comes from the paragraph that (b.3) is written out of, s.67(1)(b), which excludes property “exempt from execution or seizure under any laws applicable in the province”, and that law differs from province to province. The accounts themselves differ in ways worth knowing long before any of this comes up, and we set out how a TFSA, an RRSP and an FHSA work against each other separately.
Two more paragraphs matter. Paragraph (c) puts into the estate “any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year … in which the bankrupt became a bankrupt”, so the refund for the year of filing goes to the creditors. Paragraphs (b.1) and (b.2) exclude prescribed GST credit payments and prescribed payments relating to essential needs.
The scale of this, and what a claim in the pool is worth
The scale is not marginal. On OSB’s Insolvency Statistics in Canada for August 2026, consumers filed 146,135 insolvencies in the twelve months to 31 August 2026, up 5.8% on the year before and about 400 a day, and consumers were 96.8% of all filings under the Act. Of that total, 114,026 were proposals and 32,109 were bankruptcies. Bankruptcies grew faster, up 9.5% against 4.8%, nudging the proposal share of consumer filings to 78.0% from 78.8%.
The chart above says what a claim in that pool is worth. Across all 114,117 files closed under the Act in 2025, consumer and business together, $22.62B of liabilities produced $1.19B of dividends to creditors, or 5.28 cents on the dollar. Liabilities there cover every class of claim in those files, so that is the return on the whole claimed pool, not a recovery rate on CRA specifically. Administrative expenses took 36.0% of what came in across all files, 41.5% in bankruptcies and 33.1% in proposals. The cents per dollar and the administrative shares are our arithmetic on OSB’s Table 10.
Nothing here is a reason to file. What it is, for a reader who has been told to keep paying a balance that will not clear, is the edge of the system, and three questions decide which side of that edge someone is on: how much of the balance is personal income tax rather than money withheld from someone else, whether CRA has already registered a charge, and whether aggregate debts outside a principal-residence mortgage sit under $250,000.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Every statutory quotation in this article is verbatim from the Justice Laws consolidations as they stood on November 8, 2026. The Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, is current to October 19, 2026 and last amended on June 20, 2026, and supplies s.60(1.1), s.66.4(1), s.66.11, s.66.12(5), s.66.28, s.66.31, s.67, s.69.1, s.69.2, s.69.3, s.86, s.87, s.121(1), s.168.1, s.172.1, s.178 and s.179. Rule 59.2 of the Bankruptcy and Insolvency General Rules, C.R.C., c. 368, prescribes the deferred profit sharing plan as the only additional plan under paragraph 67(1)(b.3). Income Tax Act ss.222, 223, 224 and 227 and Excise Tax Act s.222 are from the same consolidations. CRA’s own statements come from two of its pages, each named in the article: How long a debt can be collected by the CRA, dated September 18, 2026, and Getting debt relief under special circumstances, dated January 27, 2026. The filing counts are from the Office of the Superintendent of Bankruptcy, Insolvency Statistics in Canada, August 2026, Table 2, Canada row, covering the 12-month period ending August 31, 2026. The money figures are from the same office’s Annual Report 2025, Table 10, Consolidation of All Files Closed in 2025 (BIA), Canada row, which covers consumer and business files together and counts every class of claim in liabilities, so the cents per dollar is the return on the whole claimed pool and not a recovery rate on CRA. The cents per dollar and the administrative expense shares are this site’s own arithmetic on that table and are labelled as ours wherever they appear. Before any of those figures was used, three control tests were run: that the August 2026 tables sum internally in both 12-month periods, that our reading of them reproduces all seven of the Superintendent’s own published highlight percentages to one decimal place, and that every column of Table 10 reconciles with total receipts equal to administrative expenses plus dividends to the dollar. The Deficit column in that table does not equal liabilities minus assets at the national level, so it is not used here. The chart is drawn from the same arithmetic as the article. No figure in this piece is estimated, forecast or taken from an aggregator.
