What should you do if you become insolvent?
When a business cannot pay their debts, it is said to be insolvent. In this situation, a business may file for bankruptcy or make a proposal (a payment arrangement with their creditors to prevent bankruptcy). These are legal proceedings carried out under the Bankruptcy and Insolvency Act, and must be registered with the Office of the Superintendent of Bankruptcy Canada.
Send copies of all documentation relating to your receivership, proposal in bankruptcy, or bankruptcy to your Regional Intake Centre for Insolvency (RICI) because these situations may impact your business accounts.
For more information on these situations and what to send us, see:
Responsibilities of the trustee in bankruptcy
Under the Canada Pension Plan and the Employment Insurance Act, the trustee in bankruptcy is the agent of the bankrupt employer in the event of an employer's liquidation, assignment, or bankruptcy.
If a bankrupt employer has deducted CPP contributions, EI premiums, or income tax from amounts employees received before the bankruptcy but has not remitted these amounts to us, the trustee must hold the amounts in trust. These amounts are not part of the estate in bankruptcy and should be kept separate.
If a trustee continues to operate the bankrupt employer's business, the trustee must get a new business number. The trustee has to continue to deduct and remit the necessary CPP contributions, EI premiums, and income tax according to the bankrupt employer's remittance schedule.
The trustee should prepare and file T4 information returns (slips) in the usual way.
Amounts a trustee pays to employees of a bankrupt corporation to settle claims for wages that the bankrupt employer did not pay are taxed as "other income." This income does not require CPP, EI, and income tax withholdings. The trustee has to report these payments on a T4A information return. For details, see Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary.
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