If you have an income tax debt you cannot repay, the Canada Revenue Agency (CRA) may demand repayment or take further measures, such as wage garnishment.

The CRA is a formidable creditor who can be difficult to negotiate with. They have the power to garnish your wages, seize your assets and register a lien on your property.

The good news is you can eliminate tax debt through a consumer proposal as long as the Canada Revenue Agency hasn’t registered a lien on your property.

Does a consumer proposal affect taxes?

The Canada Revenue Agency will only accept a formal debt arrangement to resolve tax debts (either bankruptcy or a consumer proposal).

To file a consumer proposal, you must first file any outstanding tax returns. Filing your income tax returns for all previous tax years lets the CRA know precisely how much you owe. They will vote against your proposal if you fail to do this.

You must file all due tax returns before you file a consumer proposal

Next, The CRA will consider the reasons for your financial difficulties, past payment history, and interactions with them before deciding whether or not to accept your consumer proposal.

Your proposal offer must be fair to the CRA but affordable enough that you can complete the payments and adhere to the terms.

You must continue to file your taxes as normal and pay any taxes due after filing a consumer proposal.

How to eliminate tax debts in a consumer proposal

You can include tax debts in a consumer proposal. It’s a formal deal between you and your creditors, which may result in you paying less than what you owe.

You can include tax debt in a consumer proposal.

You must make an offer to your creditors more financially attractive than if you declared personal bankruptcy.

You’ll receive protection from your creditors under a Stay of Proceedings. So if the CRA is garnishing your wages or your bank account is frozen, a consumer proposal will stop this action.

By settling your outstanding tax debt through a consumer proposal, the CRA will attach certain conditions, such as a minimum amount or specific terms. They often insert clauses to ensure you file and pay future taxes on time.

If the CRA is not a majority creditor, and a majority of your other creditors vote for the consumer proposal, it becomes legally binding, regardless of whether the CRA voted against it.

If you have tax debts, you need to deal with them as soon as possible. If the CRA registers a lien on your property, you cannot eliminate your tax debts through a consumer proposal or bankruptcy.

How to include CRA debts in a consumer proposal

If you want to include CRA debts in a consumer proposal, the CRA will consider the following before accepting or rejecting your proposal.

The causes of financial problems

The CRA often investigates how you got into financial difficulties in the first place. They will look at the circumstances that lead to the tax debt and the likelihood of it happening again.

They might also consider whether you have prioritized other creditors over your tax debts.

Your previous history with the CRA

It’s not uncommon for the CRA to review your historical record. They might consider your past communication with them and whether you’ve tried to make timely payments.

The objective here is to judge whether you have tried to make arrangements to resolve your debts.

Outstanding tax returns

Before filing a consumer proposal, you must file all outstanding tax returns so the CRA can determine how much you owe and decide on your offer.

Future tax returns and payments

You must file and pay your income tax returns on time while in a consumer proposal.

Once you have filed all tax returns due, the CRA will insist on a clause in your consumer proposal where you must agree to file all future tax returns on time and make payment installments when due.

Your proposal will be cancelled if you fail to adhere to the terms.

Making a fair but affordable offer

Lastly, the CRA will examine your income, expenses and assets to ensure that the consumer proposal offer is fair to them and affordable to you.

If they are happy after considering the above, the CRA will let you include your tax debts in your consumer proposal. This will only include taxes owed before you file.

Will I lose my tax refund in a consumer proposal?

A consumer proposal lets you keep future income tax refunds.

Because of the CRA’s right of set-off, one common debt recovery tactic is diverting a tax refund towards the debt you owe.

Tax refunds after submitting a consumer proposal

The CRA can issue a set-off to redirect any tax refunds for the period leading up to the year you submitted your consumer proposal. The CRA will apply these amounts to your tax debt.

If you owe tax debt on the day you file your consumer proposal and have a tax refund due for the years before you filed or for the year of filing, the CRA can keep this money and put it towards your tax debt.

For the years that follow, the CRA cannot apply your tax refunds towards the debt in a consumer proposal. This means you will keep future tax refunds.

Resolve tax debts in a consumer proposal

If you have tax debts, you can eliminate them in a consumer proposal if you meet the terms outlined by the CRA.

You must file all outstanding tax returns before filing a consumer proposal. After filing the proposal, you will continue to file your taxes as usual and pay any taxes due.

For free, confidential advice on resolving your tax issues and becoming debt-free, connect with a local Licensed Insolvency Trustee.

Get debt relief

Free consultation with a Licensed Insolvency Trustee by video, phone or in person.

  • Experienced trustees
  • Local offices
  • Personalized plan
  • No fees
Get started

It only takes 30 seconds.

Share this article