Can a Consumer Proposal or Bankruptcy Help with Tax Debt?

Struggling With Tax Debt & Wondering How a Consumer Proposal or Bankruptcy Can Help?

Individuals and business owners often grapple with tax debts owed to the Canada Revenue Agency (CRA). If you are under such circumstances, finding a solution that can help you eliminate these debts can be a major concern. The good news is that a Consumer Proposal or bankruptcy can be your lifeline in handling tax debts.

Understanding Canada Revenue Agency (CRA) Debt

Understanding the nature of your debt is crucial in determining the best approach to resolving it. If you are an individual or business owner in Canada, there are only two options for having your tax debt forgiven if you can’t pay it in full: a Consumer Proposal or personal bankruptcy.

The role of a Licensed Insolvency Trustee

When it comes to handling insolvency matters, Licensed Insolvency Trustees (LITs) are the go-to professionals. LITs are regulated and authorized by the federal government to help individuals understand their options regarding debt management.

In addition to aiding in the resolution of government tax debts, LITs also offer services in consolidating and writing off student loans, credit cards, lines of credit, and others. They provide free consultations and their administration costs are regulated by the government.

Types of CRA debts that can be forgiven

Several types of CRA-related debts can be treated like any other basic debt, such as a credit card, in a Consumer Proposal or bankruptcy. These debts can be settled at a reduced amount without interest or even completely written off. Among these debts include:


  • Income tax debt;
  • GST/HST Credit and Canada Child Benefit overpayments;
  • Business GST/HST debt;
  • Interest and penalties accrued on the above-noted debts.

Understanding source deductions debt

Employers are required to withhold source deductions from their employees’ remunerations and remit these amounts to CRA on a regular basis. Unremitted source deductions constitute a CRA liability for employers.

Consequences of not paying CRA debt

If you are unable to voluntarily settle your CRA debts in full, CRA may resort to the following actions:


  • Charge daily compounding interest and penalties for late-filed returns;
  • Apply a refundable credit to your debt;
  • Seize your bank account or freeze its funds;
  • Garnish your income;
  • Register a lien on your property;
  • Seize and sell your assets.


Dealing with Outstanding Taxes and CRA Debts

If you have a balance owing to CRA, you can connect with a local BC Licensed Insolvency Trustee to learn more about calculating your Consumer Proposal payments to consolidate and reduce all your debts, including those to CRA, or whether bankruptcy may be the best solution for you.

Consolidating Tax Debt in a Consumer Proposal

A Consumer Proposal can include all debts to CRA such as income taxes, business GST/HST, and source deductions. It is the only solution in Canada that can be used to avoid personal bankruptcy and settle government debts for less than the full amount owed.

Writing off Tax Debt in a Personal Bankruptcy

Filing a personal bankruptcy in Canada can result in your debts being fully forgiven by creditors, including those owed to CRA for income taxes, business GST/HST, and source deductions.

Personal Tax Debt of $200,000 or More

In a bankruptcy scenario, if your personal income tax debts are $200,000 or more and represent more than 75% of your total unsecured debts, you will not be automatically discharged in a personal bankruptcy.

Making a Consumer Proposal If Your Taxes are not Filed

If you already have a balance owing to CRA, your tax returns will need to be filed up to date for CRA to determine the precise amount owing and vote in favor of accepting your Consumer Proposal.

Provisional Tax Return in a Consumer Proposal

A provisional tax return filed will cover the period from the beginning of the current year (January 1) and end on the date you start your Consumer Proposal. A second tax return would later be filed to cover the period from the date of your Consumer Proposal to the end of the year (December 31).

What Happens to my Tax Returns During a Consumer Proposal?

Keeping your tax filings and tax remittances up to date is an important part of a successful Consumer Proposal. Once your Consumer Proposal has been accepted by your creditors, you will resume filing and paying your tax obligations as normal.

Declaring Personal Bankruptcy If Your Taxes are not Filed

You can file personal bankruptcy in Canada even if your tax returns have not been filed up to date.

What Happens to my Tax Returns During a Bankruptcy?

If you have prior year tax returns that are not filed at the time you start bankruptcy, your Licensed Insolvency Trustee will file them for you, based on the information you provide.

Pre- and Post-Bankruptcy Tax Returns

The tax year that you start your bankruptcy in will be divided into two tax returns – the pre-bankruptcy income tax returns and post-bankruptcy income tax returns.

In conclusion, understanding how CRA debts can be included in a Consumer Proposal or bankruptcy, in addition to other debts you may have, can be complex. A Licensed Insolvency Trustee can help you evaluate your options so you can determine how to best move forward.

Book your free confidential debt consultation now to meet with a friendly local Licensed Insolvency Trustee. We’re here to help you understand your options and get a plan to be debt-free.

This content is intended as a basic overview and does not constitute specific legal advice. The law is an ever-changing body of statutes and decisions, and the reader is advised to seek legal counsel for specific matters relating to their situation.

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