Can Taxes Be Included in a Consumer Proposal?

Tax debt is a common cause of financial distress for many individuals. When faced with tax debt that seems insurmountable, one may wonder: Can taxes be included in a consumer proposal? In this comprehensive guide, we will explore this question in detail, providing insights into personal income tax returns, dealing with tax debt, and the impact of a consumer proposal on tax obligations in Ontario.

Understanding Consumer Proposals

A consumer proposal is a formal agreement crafted under the auspices of a Licensed Insolvency Trustee (LIT). This arrangement allows an individual to repay a portion of their debts over a specified period, providing a viable alternative to personal bankruptcy. One of the attractive features of a consumer proposal is the ability to include tax debt.

Tax Refunds and Consumer Proposals

When you file a consumer proposal, you may be able to keep your tax refunds, depending on your circumstances and the specifics of your proposal. In general, if you have no outstanding tax return filings and no previous tax debt, the Canada Revenue Agency (CRA) will continue to send you your tax refunds. However, the CRA has the right to offset your tax refunds against the tax debt you owe for other tax years prior to your proposal filing.

Filing of Personal Income Tax Returns

Before filing a consumer proposal, it is crucial to ensure that all your outstanding income tax returns are filed or ready to be filed. If you have unfiled income tax returns, the CRA will not accept your consumer proposal. It is also advisable to file two tax returns for the year of the proposal – one for the period from January 1 to the date of the proposal, and another from the date of your proposal to December 31.

Handling Income Tax Debt

Upon filing a consumer proposal, taxes are treated as unsecured debt, much like credit card debts or personal loans, provided no lien has been issued against your property by the CRA before the filing of your consumer proposal. It’s crucial to inform your Licensed Insolvency Trustee if you owe taxes so you can receive appropriate advice.

Income Tax After Filing a Consumer Proposal

Any taxes due on income earned after filing a consumer proposal cannot be included in the consumer proposal. These amounts are required to be paid in full and on time. You are also required to continue to file all future tax returns as prescribed by law in a timely manner.

The Role of a Proposal Administrator

The proposal administrator plays a crucial role in the consumer proposal process. Typically, a Licensed Insolvency Trustee (LIT) serves as the proposal administrator. They are responsible for preparing the consumer proposal, filing it with the Office of the Superintendent of Bankruptcy (OSB), and administering the proposal process.

Advantages of Including Taxes in a Consumer Proposal

Including taxes in a consumer proposal offers several benefits. First, it allows you to consolidate all your debts, including tax debts, into a single monthly payment. Second, a consumer proposal can halt collection actions by the CRA, such as wage garnishments or freezing of bank accounts. Lastly, a successful consumer proposal can result in a significant reduction in the total amount of debt payable.

Potential Drawbacks

While there are numerous advantages to including taxes in a consumer proposal, there might also be potential drawbacks. One of the primary concerns is that the CRA may reject the proposal if all income tax returns are not filed. Furthermore, the consumer proposal only covers taxes owed up to the date of filing the proposal. Any taxes due after this date are not included and must be paid in full.

Getting Help: Licensed Insolvency Trustees

Navigating the complexities of tax debts and consumer proposals can be challenging. Licensed Insolvency Trustees (LITs) are professionals who can provide guidance and advice regarding financial difficulties, including tax debts and consumer proposals. They can help you understand if a consumer proposal is a viable solution for your situation and guide you through the process.

Taking the First Step Towards a Debt-Free Life

If you are overwhelmed by debt, including tax debt, taking the first step towards a debt-free life can be as simple as reaching out for help. Consult with a Licensed Insolvency Trustee to discuss your financial situation and explore all your options. Remember, it’s never too late to start your journey towards financial freedom, and yes, taxes can indeed be included in a consumer proposal.

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