Navigating CRA Debt with a Consumer Proposal: A Comprehensive Guide
As financial challenges become increasingly common, many Canadians are seeking assistance to manage their debt. One exceptional method to tackle Canada Revenue Agency (CRA) debt is through a consumer proposal. This article explores the intricacies of a CRA debt consumer proposal and provides essential tips for managing tax debt.
What is a CRA Debt Consumer Proposal?
A consumer proposal is a formal agreement designed by a Licensed Insolvency Trustee (LIT) and presented to your creditors. It outlines a new payment plan which allows debtors to repay a portion of their total debt amount over a specified period. A CRA debt consumer proposal is specifically tailored to address tax debts owed to the CRA.
Note: A common misconception is that tax debt cannot be included in a consumer proposal. Contrarily, most tax debts can be included in a consumer proposal, just like any other debt.
Key Advantages of a CRA Debt Consumer Proposal
There are numerous benefits to handling your tax debt through a consumer proposal:
- Protection from Legal Action: Filing a consumer proposal initiates a “stay of proceedings,” which halts any collection action by creditors, including the CRA. This means wage garnishments or bank account freezes are immediately ceased.
- Flexible Repayment Terms: A consumer proposal offers you the opportunity to repay your tax debt on more reasonable terms than demanded by the CRA. The proposal terms are flexible and can be customized to fit your specific financial situation.
- No Interest Charges: Once a consumer proposal is filed, interest charges on the debt are frozen. This can result in significant savings, especially if you have a high tax debt.
- Less Impact on Credit Rating: Compared to bankruptcy, a consumer proposal has a less severe impact on your credit rating.
Crafting a Successful CRA Debt Consumer Proposal
While a consumer proposal can be an effective solution for CRA debt, there are specific considerations to ensure its success:
1. File All Income Tax Returns
Before considering a consumer proposal, ensure that all income tax returns are filed, even if the CRA has raised notional assessments. Filing your tax returns is a prerequisite for the CRA to consider your proposal.
2. Accurate Income Disclosure
The CRA will compare your past earnings to your current earnings. If your current earnings are significantly lower than in the previous year, you should have a valid explanation for the reduction.
3. Ensure Future Tax Compliance
Your consumer proposal should include a clause stating that you agree to file future tax returns promptly, make installment payments on self-employed income, and generally pay your income taxes on time.
4. Provision for Current Year’s Taxes
You can include a provision in your consumer proposal for the income tax that you will owe in the current year, up to the date of filing the proposal.
5. Fair and Reasonable Terms
The CRA will carefully review your income, expenses, assets, and other information to determine if you are putting your best offer forward. This might require you to cut back on non-essential spending during the term of your proposal.
The Role of a Licensed Insolvency Trustee (LIT)
A Licensed Insolvency Trustee plays a critical role both in the creation and administration of a consumer proposal. They assist you in collecting and organizing all relevant financial information, crafting the proposal, filing the necessary documents, and managing payments and communication with creditors.
Note: Only a Licensed Insolvency Trustee can administer a consumer proposal.
Benefits Post-Filing of a Consumer Proposal
Once you file a consumer proposal, several benefits kick in:
- Creditors can no longer contact you directly; all inquiries must go through the Trustee.
- Legal actions, wage garnishments, or debt collection activities are halted.
- You gain relief from financial stress and can focus on making the agreed payments.
Acceptance of the Consumer Proposal
Once the proposal is filed, creditors have 45 days to consider it. The proposal is generally accepted if a majority in dollar value of the creditors agree. If CRA is a majority creditor, their acceptance is crucial for the proposal to succeed.
Post-Acceptance Phase
Once creditors accept your proposal, it is deemed accepted by the Court, and your scheduled payments begin. Upon completion of all payments, the Trustee prepares a Certificate of Full Performance and submits a copy to the Office of the Superintendent of Bankruptcy.
Starting the CRA Debt Consumer Proposal Process
If you are struggling with CRA debt and considering a consumer proposal, the first step is to set up a consultation with a Licensed Insolvency Trustee. This consultation is typically free and confidential. The LIT will review your financial situation and help you determine the best solution for your circumstances.
In conclusion, a CRA debt consumer proposal can be an effective strategy to manage and eventually eliminate your tax debt. Remember to consult with a Licensed Insolvency Trustee to ensure you are making the right decision for your financial future.
