Preparing a bankruptcy return

The DT Max program includes the bankruptcy module, enabling you to prepare tax returns for bankrupt taxpayers. This tool will make your work easier namely by adjusting the calculation of credits and carrying the pre-bankruptcy data forward to the post-bankruptcy period, and by managing the more specific aspects of the production of such returns.

Types of bankruptcy returns

In the year of bankruptcy, three types of bankruptcy returns may be filed:

• the pre-bankruptcy return, which comprises all the relevant tax information until the date of bankruptcy;

• the post-bankruptcy return, which includes all relevant tax information from the date of bankruptcy until the end of the year;

• the trustee's return, used for non incorporated businesses that are pursuing their activities at the date of bankruptcy under the supervision and control of a trustee in bankruptcy.

Usually, a trustee in bankruptcy is assigned the task of having the bankruptcy returns prepared. They remain his responsibility whether he does the work himself or hires another accountant or tax preparer to do it. However, the bankrupt taxpayer is often required to file the post-bankruptcy return.

The pre-bankruptcy return

To prepare a pre-bankruptcy return, use the regular tax file for the bankrupt taxpayer.

1. Enter the keyword Bankruptcy and choose the option Pre-bankruptcy return among the choices available.

2. Use the keyword BankruptDate to enter the date of the bankruptcy and indicate whether you want that date printed in the top section of page 1 of the federal return.

   Note: Although many tax preparers prefer to have the bankruptcy date printed in that particular location, the CRA objects to this practice. Therefore, DT Max enables you to override this selection.

3. Enter the data for the pre-bankruptcy tax return, namely the income, losses, and deductions until the date of the bankruptcy.

DT Max will calculate the pre-bankruptcy return as well as the amounts to be carried forward from it to the post-bankruptcy return.

The post-bankruptcy return

To prepare a post-bankruptcy return, use a DT Max plan to reproduce the pre-bankruptcy declaration.

If you produced the pre-bankruptcy declaration , follow these steps:

1. Click on the drop-down menu "Production" and select "Plan A (blank)"

2. The window "Copy tax plan" will appear, select the option "Copy from production" and click OK.

3. Return to production in the Data entry screen.

4. In the current file, delete the data you have entered for the pre-bankrupt return.

5. In the drop-down menu of the right-hand side, select the option "C/F to stub period/post-bankruptcy".

6. All carryforwards from pre-bankruptcy will appear on the right-hand side of your screen in the Bankruptcy group. They are amounts from the pre-bankruptcy return necessary to calculate certain credits or deductions in the post-bankruptcy return.

7. Mark [F5] the data from the keyword group Bankruptcy and copy to the left-hand side [Alt+C].

8. You are now ready to complete the relevant data for the post-bankruptcy return of your client from the bankrupt date to the end for the year.

If you did not produced the pre-bankruptcy declaration , follow these steps:

Step 1 – Reproduce the Pre-Bankruptcy Tax Return in a Plan

In the treatment of a post-bankruptcy return, we need to begin by reproducing the pre-bankruptcy return prepared by the trustee.
Follow these steps:

1. Click on the drop-down menu "Production" and select "Plan A (blank)" .

2. The window "Copy tax plan" will appear, select the option "Keep blank" and click OK.

3. Add the keyword Bankruptcy and choose the option "Pre-bankruptcy return".

4. In the keyword BankruptDate, enter the date of bankruptcy and specify if you want this date to be printed at the top of page 1 of the federal return.
   Note: Many tax preparers prefer to show the date of bankruptcy in this place, the CRA opposes to this practice. Therefore, DT Max allows you to not indicate this information.

5. Record data relevant to the pre-bankruptcy period, which runs from January 1st until the day before bankruptcy was declared. Recalculate the tax return of your client [Alt+F9].
   DT Max will calculate the pre-bankruptcy return as well as all of the carryforwards required for the post-bankruptcy return.

Step 2 – Copy Carryforwards from Pre-Bankruptcy Return

After the reproduction of the pre-bankruptcy return, continue as follows:

1. Return to production in the Data entry screen.

2. In the drop-down menu of the right-hand side, select the option "C/F to stub period/post-bankruptcy".

3. All carryforwards from pre-bankruptcy will appear on the right-hand side of your screen in the Bankruptcy group. They are amounts from the pre-bankruptcy return necessary to calculate certain credits or deductions in the post-bankruptcy return.

4. Mark [F5] the data from the keyword group Bankruptcy and copy to the left-hand side [Alt+C].

Step 3 – Record Data for the Post-Bankruptcy Return

You are now ready to complete the relevant data for the post-bankruptcy return of your client from the bankrupt date to the end for the year.

Note that DT Max does not prorate the amounts coming from information slips and/or tax receipts. So you have to manually subtract the amounts already entered in the pre-bankruptcy return of the total amount shown on these information slips or receipts and only declare the difference corresponding to the post-bankruptcy period.

After entering the information for the post-bankruptcy, recalculate and DT Max will automatically prorate personal amounts based on the number of days for each period.

Business income: The choice of QPP contributions based on income for the entire year or separately between the two periods is done in the pre-bankruptcy return using the keyword QPP-Election in the Bankruptcy group.

Income Tax Refunds

Since July 7, 2008, income tax refunds for both the pre- and post-bankruptcy period form part of the estate of the bankrupt. Before that date, refunds related to the post-bankruptcy could be redirected to a trustee only if an Authorization and Direction letter (signed by the taxpayer) was attached to the tax return. Without this letter, the post-bankruptcy refund was sent to the taxpayer. Since the amendments to paragraph 67(1)(c) of the Bankruptcy and Insolvency Act, the trustee is no longer required to submit an Authorization and Direction letter to the post-bankruptcy return if bankruptcy date is July 7, 2008 or after. The post-bankruptcy refund is automatically part of the bankrupt estate. Then, the question regarding post-bankruptcy tax refunds transferred to the trustee has been deleted because it is no longer relevant.

The trustee's return

To prepare the trustee's return, use a DT Max plan.

1. Enter the keyword Bankruptcy and choose the option Trustee's return.

2. Report the income or losses pertaining to the property and business of the bankrupt taxpayer during the bankruptcy.

3. DT Max will calculate the return by cancelling the basic personal credits (basic amount, age amount, disability amount, etc).

4. No amount is automatically carried forward from a trustee's return. The amounts to carry forward from that return must be entered manually.

The trustee's return is filed by the trustee himself. The trustee may not claim personal tax credits or deductions when calculating the taxable income, with the exception of the deductions for the losses incurred in previous years. This return must be filed by the end of the month of March of the following year.

Non refundable tax credits

The total non refundable tax credits claimed by a bankrupt taxpayer in the year for both the pre-bankruptcy and post-bankruptcy periods cannot exceed the amount that could be claimed as per the calendar year (ITA s.118.95).

Personal tax credits such as the age and the disability amounts, as well as the transfers of unused credits are prorated by the number of days in the period for which the return is produced.

The pension income amount, the credit for charitable donations, the credit for medical expenses, and the tuition fees and education amounts will be based on the respective amounts pertaining to each period.

If there is a spouse and/or dependant...

When preparing the pre-bankruptcy return of the bankrupt taxpayer, enter the net income only for the spouse, for the entire year. If the calendar year is not yet over at the time of the filing of the return, this amount may be an estimate if need be. An adjustment may be made to the return at a later date.

If the spouse is not bankrupt, his/her return must be calculated with the post-bankruptcy return of the bankrupt taxpayer. Ensure that all information pertaining to the spouse is entered in the appropriate tax plan corresponding to the taxpayer's post-bankruptcy return. Enter the spouse's data for the entire year.

If the spouse is bankrupt as well, you can use the keyword Bankruptcy for both spouses.

Production requirements

The type of bankruptcy return and the trustee's number appear in the top portion of the first page of the tax return.

The federal returns are addressed to the trustee. The option Identification in the Preferences menu allows you to enter the trustee's address as the alternate address of the tax preparer. If you must enter a different trustee number for a particular client, use the keyword TRUSTEE-NUM .

The returns prepared for bankrupt taxpayers cannot be filed electronically, except for the federal pre-bankruptcy return.