The federal government of Canada changed the rules to make bankruptcy more expensive for many Canadians in 2009. The government has adopted an income test to determine how much a person must pay while bankrupt, and to determine how long a personal bankruptcy in Canada will last.

Under the old rules, each bankrupt was required to prove their income to their trustee each month, generally by submitting copies of their pay stubs. If their income exceeded a set amount, the bankrupt was required to pay a penalty of half of the amount they were over the limit.

Those rules still exist, but with an added twist. If on average the bankrupt’s income is more than $200 over the limit each month, the bankruptcy period is extended by an extra year, and the bankrupt is required to make surplus income payments for an additional year.

in 2009 a single person with no dependents and no unusual expenses is permitted to earn $1,870 per month, after taxes. If they earn $2,470 per month, they are $600 over the limit, so they are required to pay a surplus income penalty of $300 per month. Even worse, because their surplus income is over $200 per month, their bankruptcy will last for 21 months, as compared to a bankruptcy with no surplus income that can end in 9 months. They are required to pay the $300 penalty for 21 months, so obviously the cost of the bankruptcy is double what it was under the old rules.

The above example applies in the case of a first bankruptcy. In a second bankruptcy the bankruptcy period is automatically extended to 36 months.

It is critical that a knowledgeable bankruptcy trustee is consulted before bankruptcy is filed, to do a detailed estimate of potential surplus income. Here’s why:

A quick review may indicate that the bankrupt is expected to earn $1,000 every two weeks, or $2,000 in a typical month. Since $2,000 is only $130 above the limit of $1,870, it would appear that this person can expect to be discharged from bankruptcy in nine months. However, that may not be the case.

Twice each year a person who is paid bi-weekly will receive three pays. In those months their income is $3,000, or $1,130 over the limit. If they have two of those three-pay months during the bankruptcy, their average surplus income will be higher than $200 per month, and their bankruptcy will be extended for an extra twelve months. Obviously expert advice is required to accurately estimate the payments required in a bankruptcy in Canada, and that advice should be obtained before you decide to go bankrupt.

The Canada Revenue Agency is the equivalent of the IRS in the states. Unlike the IRS, it tends to move forward with innovate tax solutions. Recently, it announced a new technique for finding people that owe back taxes. Yep, the program surfs the internet looking for posts made by the people that might lead the government to them. Canada is undertaking the program jointly with the tax agencies for the Netherlands, United Kingdom, Demark and Austria.

The program in question is called Xenon, not to be confused with Xena the warrior princess on television. The program works by taking the names of “missing” taxpayers and hunting for them on the net. It trolls through forums, porn sites, auction sites, gambling sites and just about anywhere someone might drop their name.

There are, of course, a couple of problems with the internet sweep approach. First off, most people don’t use their real names when posting given the threat of identity theft. Second, the issue of privacy rights certainly would seem to come up, particularly if the program hacks into protected membership areas. Nobody has any answers to these issues because it is not entirely clear how the program works. Still, you can expect some controversy in the future.

If you don’t live in Canada or these other countries, you are probably wondering why you should care about this at all. Well, citizens of the United States should be on alert. The IRS annually reports tax gaps of hundreds of billions of dollars. A good percentage of this is due to people that just stop paying taxes. The IRS does not have the manpower to track all of them down, but things could become much easier if a simple computer could do it for them. If this occurs, all heck is going to break out for a lot of people. Imagine bidding on stuff on EBay only to find your debit card and bank account have been frozen!

In truth, people that don’t pay taxes only have themselves to blame. Still, the idea of the government sweeping the web for information is a more than a little troubling.