Consumer Proposal and CRA Debt

Consumer Proposal and CRA Debt

A Comprehensive Guide on Dealing With Consumer Proposal and CRA Debt

If you find yourself grappling with tax debt, you’re certainly not alone. Many Canadians are dealing with unresolved debts owed to the Canada Revenue Agency (CRA). Fortunately, there are legal options available to you, such as consumer proposals and bankruptcy, that can alleviate this financial burden. The following guide explores these options in detail, providing insight into how they can help with your CRA debt.

Understanding CRA Debt

CRA debt refers to any outstanding amount owed to the Canada Revenue Agency. This could be a result of unpaid income taxes, GST/HST, or other penalties and interest accrued on these amounts. If not handled promptly, CRA debt can lead to severe financial consequences, including garnished wages, seized assets, and hefty interest charges.

Types of CRA Debt

The types of CRA debt that can be addressed through a consumer proposal or bankruptcy include:

  1. Income tax debt
  2. GST/HST Credit and Canada Child Benefit overpayments
  3. Business GST/HST debt
  4. Interest and penalties accrued on the above-noted debts

Consumer Proposals and CRA Debt

A consumer proposal is a legal procedure administered by a Licensed Insolvency Trustee (LIT) that allows you to settle your debts by making a proposal to your creditors, including the CRA. This proposal often includes offering to pay a percentage of what is owed, extending the time allowed to pay off the debt, or a combination of both.

Key Features of Consumer Proposals

Protection from Creditors

Once a consumer proposal is filed, creditors are legally prohibited from taking any collection action against you. This means they cannot garnish your wages, sue you, or even contact you regarding the debt.

Flexible Payment Terms

A consumer proposal provides flexible payment terms tailored to your financial situation. You will have up to five years to complete the payments, and the payments will be interest-free.

Reduction of Debt

In a consumer proposal, you can negotiate to pay less than the total amount you owe. Typically, you will end up paying only a fraction of the original debt.

How Consumer Proposals can Help with CRA Debt

If you owe tax debt to the CRA, a consumer proposal can help in the following ways:

  1. Inclusion of Tax Debt: Consumer proposals can include virtually all types of CRA debts, such as income tax, GST/HST, and source deductions.
  2. Interest Freeze: Once you file a consumer proposal, interest on your CRA debt stops accruing.
  3. Garnishment and Seizure Halt: Filing a consumer proposal also halts any wage garnishments or asset seizures by the CRA.

Bankruptcy and CRA Debt

Bankruptcy is another legal process that can be used to address overwhelming CRA debt. It involves surrendering your assets to a Licensed Insolvency Trustee in exchange for the elimination of your debts.

Key Features of Bankruptcy

Immediate Stay of Proceedings

Filing for bankruptcy provides an immediate stay of proceedings, which prevents creditors, including the CRA, from taking any collection action against you.

Debt Discharge

Upon the completion of your bankruptcy, your debts will be discharged. This means you will no longer be legally required to pay these debts.

Credit Counselling

During bankruptcy, you will receive credit counselling, which can teach you financial management skills to prevent future debt problems.

How Bankruptcy can Help with CRA Debt

If you owe tax debt to the CRA, bankruptcy can help in the following ways:

  1. Elimination of Debt: Bankruptcy results in the elimination of most, if not all, of your debts, including CRA debt.
  2. Freeze on Interest: Upon filing for bankruptcy, interest stops accruing on your tax debt.
  3. Lifting of Legal Actions: Bankruptcy also lifts any legal actions taken by the CRA, such as wage garnishments or asset seizures.

Choosing Between Consumer Proposal and Bankruptcy

Deciding between a consumer proposal and bankruptcy depends on your financial situation and personal circumstances. Both options can effectively deal with CRA debt, but they also have their respective advantages and drawbacks.

How to Make the Right Choice

Making the right choice between a consumer proposal and bankruptcy involves considering the following factors:

  1. Debt Amount: The total amount of your debt can influence which option is more suitable. For example, a consumer proposal might be a better option if you owe a significant amount in CRA debt, as it allows you to pay only a portion of what you owe.
  2. Assets: If you have significant assets that you want to keep, a consumer proposal might be more appealing, as bankruptcy involves surrendering your assets.
  3. Income: Your income level can also affect your choice. Higher-income individuals might prefer a consumer proposal, as bankruptcy requires surplus income payments.
  4. Credit Rating: Both a consumer proposal and bankruptcy will affect your credit rating, but bankruptcy has a more severe impact and takes longer to recover from.

Consult a Licensed Insolvency Trustee

To make an informed decision about dealing with your CRA debt, it’s advisable to consult a Licensed Insolvency Trustee. They can assess your financial situation, explain your options, and help you choose the best course of action.

Dealing with CRA Debt: The Process

Whether you choose a consumer proposal or bankruptcy, the process of dealing with CRA debt involves several steps.

Consultation with a Licensed Insolvency Trustee

The first step is to consult with a Licensed Insolvency Trustee. They will assess your financial situation, explain your options, and recommend the best course of action.

Preparation and Filing

Once you’ve decided on a course of action, the LIT will prepare the necessary documents to file either a consumer proposal or bankruptcy. This will include a detailed list of your assets, debts, income, and expenses.

Acceptance by Creditors

For a consumer proposal, your creditors, including the CRA, will have 45 days to vote on whether to accept your proposal. If the majority of your creditors accept the proposal, all of them are bound by its terms.

Completion

For a consumer proposal, you will have to make the agreed-upon payments to your LIT over a specified period (up to five years). Once you’ve made all the payments, your debts will be considered settled.

In a bankruptcy, you will surrender your assets to the LIT and make required payments (if applicable). Upon the completion of your bankruptcy, your debts will be discharged.

Conclusion

Dealing with CRA debt can be stressful, but you don’t have to face it alone. By consulting with a Licensed Insolvency Trustee, you can explore your options and choose a course of action that best suits your situation. Whether you choose a consumer proposal or bankruptcy, both options can provide you with the relief you need to move forward and achieve financial stability. Remember, the sooner you take action, the more options you will have to resolve your CRA debt.

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