When things go awry in one’s business or personal affairs, taxes often get neglected. The Canada Revenue Agency (CRA) does not forget about these tax obligations, however, and has extensive collections powers available to it, including “directors liability” assessments which can transform corporate tax debts into personal tax debts of the affected directors.

The question that many directors and affected personal taxpayers often ask is whether these personal tax debts can be avoided on personal bankruptcy.

The answer is that “it depends”. Recent case law has been swinging toward forcing substantial payments by bankrupts where there are taxes owing to the CRA, as was seen in a recent British Columbia Supreme Court decision in Re Van Eeuwen [2012] GSTC 142.

The taxpayer applied to the British Columbia Supreme Court for a discharge in bankruptcy, which would effective put him on fresh feet, and allow him to proceed in life unencumbered by his previous debts.

The application was opposed by the CRA, to whom the bankrupt owed some $660,000 incomes tax and $110,000 in GST.

In the result, the bankrupt was ordered to pay $180,000 as a condition of the discharge, which approximated 23% of the total amount owing (or seen another way, about 60% of the principal amount owing – the balance being made up of interest and penalties). He was also ordered to bring all CRA filings up to date.

While a hefty price to pay relative to most bankruptcies, the amount can also be viewed as modest in light of the total amounts owing (which are paid by non-bankrupts as a normal part of everyday business).

Taxpayers facing these sorts of difficulties can often further minimize their tax liabilities with good tax advice before hand, as there are a number of defences available to taxpayers when faced with corporate or directors liability assessments. Sometimes it pays to obtain that advice.