To prepare a return for a bankrupt client, two tax returns must be completed: a pre-bankruptcy return and post-bankruptcy return. A trustee's return may also be required.
File a bankruptcy return
ProFile T1 includes two forms that relate to bankruptcy. The first is called Bankruptcy Information. Use this form to indicate the type of bankruptcy return and to provide some amounts that are used in calculating non-refundable tax credits.
The second form is the DC905, used to complete the bankruptcy identification, including trustee and client information. Complete the fields under Options > Environment... > Trustee tab. ProFile automatically transfers this information to the DC905 form.
1. On the Bankruptcy form, indicate the type of bankruptcy return to be prepared. At least two returns need to be saved for a client claiming bankruptcy. By default, ProFile includes (Pre), (Post) or (Trustee) in the name of the file.
ProFile can automatically include the bankruptcy return type in the file name, to help distinguish between multiple returns for the same client. To use this feature, complete the INFO form and Bankruptcy form before the new client file is saved. Otherwise, the file name can be changed to reflect the bankruptcy type later.
2. Enter the date of bankruptcy. This date is used to prorate the appropriate credits (based on the number of days before and after bankruptcy).
3. Enter amounts from the associated pre-bankruptcy or post-bankruptcy return in the table. These amounts are used for the appropriate bankruptcy calculations (such as summing pre- and post-net income for the purpose of the age amount on form OtherCredits).
4. Form DC905 will complete automatically based on the information you've entered in the tax return under Options > Environment options > Trustee and on the Bankruptcy form.
5. By default, ProFile prints the DC905 form first. This is because the return must be submitted with DC905 as the cover sheet.
6. ProFile indicates the type of bankruptcy return in a field at the top of the T1 jacket.
Bankruptcy returns require some manual calculation. For both pre- and post-bankruptcy returns, one must calculate the applicable portion of income and deductions, based on the portion of the calendar year covered by each return. For example, do not enter the complete T5 information for the year. Rather, enter the portion of that income attributed to the pre- and post-bankruptcy return. ProFile then calculates the non-refundable tax credits based on those amounts.
It is necessary to report pre-bankruptcy details on the Bankruptcy information form to satisfy CRA requirements when filing a post-bankruptcy return.
The general rule is that a credit cannot be claimed in the pre- and post-bankruptcy return if, cumulatively, it would be higher than what one could otherwise claim for the entire year. As such, someone should not be making the full claim in both the pre-and post-bankruptcy return.
In both pre-and post-, the Canada Employment amount is calculated. Schedule 1 must be overridden to avoid the Canada Employment amount from being claimed.