Consumer Proposal and Tax Debt

How a Consumer Proposal Impacts Tax Debts

Dealing with tax debt can be an overwhelming experience. The Canada Revenue Agency (CRA) possesses significant power to collect debts, which can lead to stress and financial hardship. However, there is a solution – Consumer Proposal. This article will guide you through the intricacies of managing tax debt through a Consumer Proposal, providing useful insights and practical steps to take control of your financial future.

Understanding Consumer Proposal and Its Role in Managing Tax Debt

A Consumer Proposal is a legal agreement set up by a Licensed Insolvency Trustee (LIT) between you and your creditors to repay a portion of your debts over a period of time. A noteworthy feature of a Consumer Proposal is its ability to include tax debts.

A common myth is that tax debt cannot be included in a Consumer Proposal or bankruptcy. However, most tax debt can be included in a Consumer Proposal and is treated similarly to other debts. This means that you can address your tax debt along with your other debts in a single, streamlined process.refund

Licensed Insolvency Trustees: Your Ally in Tax Debt Management

Licensed Insolvency Trustees are federally regulated professionals who can help you navigate the process of a Consumer Proposal or bankruptcy. They have the knowledge and experience to guide you through the various debt solutions available, ensuring that your best interests are represented.

LITs offer free consultations to assess your financial situation and provide advice on the most suitable debt relief solution. They can handle debts such as income tax debt, GST/HST Credit and Canada Child Benefit overpayments, business GST/HST debt, and interest and penalties accrued on these debts.

The Consequences of Unpaid CRA Debts

Ignoring your CRA debts can lead to severe consequences. If you fail to repay your debts, the CRA can take actions such as:


  • Applying interest and penalties to your debt;
  • Seizing or freezing your bank account;
  • Garnishing your income;
  • Registering a lien on your property;
  • Initiating the seizure and sale of your assets;


Addressing Unfiled Tax Returns and Future Tax Compliance

Before filing a Consumer Proposal, it’s crucial to address any unfiled tax returns. The CRA is unlikely to accept a proposal if there are outstanding tax returns, and you will be required to file them before proceeding.

Furthermore, while a Consumer Proposal deals with existing tax debt, it does not cover future taxes. This means that you will need to agree to file your future tax returns on time, make any required instalment payments, and generally comply with your tax obligations.

Factoring in Current Year’s Taxes and Income Disclosure

When making a Consumer Proposal, you can include a provision for the income tax you expect to owe in the current year, up to the date of filing. Your LIT will help you calculate this amount based on the information you provide.

It’s also essential to accurately report your income. The CRA will compare your reported current earnings with your past earnings, so if there is a discrepancy, you should provide an explanation to your LIT.

Crafting a Fair and Reasonable Proposal

The CRA will review your Consumer Proposal to determine if it represents your best offer given your income, expenses, and assets. This means that you may need to cut back on non-essential spending during your proposal. Your LIT can offer advice on managing your cash flow effectively.

Consumer Proposal Process: From Filing to Acceptance

Once you file a Consumer Proposal, creditors have 45 days to review it. A majority in dollar value of the creditors must agree to the proposal for it to be accepted. If the CRA is a majority creditor, their support will be crucial for a successful outcome.

Filing a Consumer Proposal immediately puts a “stay of proceedings” into effect, halting any collection actions by creditors. This means that if your wages are being garnished or your bank account is frozen, these actions will stop, providing you with immediate relief.

Retaining Tax Refunds and Filing Personal Income Tax Returns

Unlike bankruptcy, a Consumer Proposal allows you to retain your tax refunds, assuming you have no outstanding tax return filings or previous tax debt. However, the CRA may use your tax refunds from the years before your proposal to offset other tax debts from those years.

You remain eligible to receive tax refunds for the income earned after the proposal is filed. For the year of the proposal filing, it’s recommended to file two tax returns, one for the period from January 1 to the date of the proposal, and a second one for the rest of the year.

Dealing with Tax Debt Post-Consumer Proposal

Once your Consumer Proposal is accepted, you must keep up with your future tax obligations. This means filing and paying your taxes on time. If you are entitled to a tax refund, you will receive it as per usual.

The Path to Financial Freedom: Your Next Steps

Navigating the world of Consumer Proposals and tax debt can be complex and stressful. However, with the right guidance and support, you can take control of your financial situation and work towards a debt-free future.

A Licensed Insolvency Trustee can help you understand your options and create a plan tailored to your needs. Don’t wait until your situation becomes more challenging; take the first step towards financial freedom today.

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