CRA Refund After A Consumer Proposal

Understanding CRA Refunds After Consumer Proposal: A Comprehensive Guide

In the financial world, understanding the intricacies of debt relief mechanisms like a consumer proposal can be daunting. One aspect that often confuses individuals is the fate of their income tax refund from the Canada Revenue Agency (CRA) after filing a consumer proposal. This guide aims to shed light on this subject and provide clarity on what happens to your CRA refund after a consumer proposal.

Introduction

When it comes to managing debt, many individuals turn to a consumer proposal as a viable option for financial relief. One common question that individuals often grapple with is how a consumer proposal might affect their annual income tax refund from the Canada Revenue Agency (CRA). To help answer this question, this guide explores the impact of a consumer proposal on your CRA refund, with insights drawn from expert sources.

Consumer Proposal: A Brief Overview

A consumer proposal is a legally binding agreement between you and your creditors that allows you to pay back a portion of your debts over a specified period, often up to five years. It’s an alternative to bankruptcy, offering debtors a chance to settle their debts without losing all their assets.

Impact of a Consumer Proposal on CRA Refunds

In Case of Bankruptcy

When an individual files for bankruptcy, their income tax refund for the year of filing and any due refunds from previous years are considered assets. These refunds are automatically lost to the trustee who then distributes them among the creditors. This rule applies even if the individual amends a previously filed return or applies for a disability tax credit for any years up to or including the year of filing the bankruptcy.

In Case of a Consumer Proposal

The situation is different in the case of a consumer proposal. Here, one of the benefits is that you maintain all your assets, including your income tax refund. So, unless you have outstanding taxes, you do not lose any tax refunds when you file a consumer proposal.

However, if you owe the CRA money for any past tax year at the time of filing, the CRA retains any refunds on income earned before the date of filing a consumer proposal. They offset these refunds against any past debts you owe them.

Who Prepares Your Tax Return After a Consumer Proposal?

In a bankruptcy scenario, your trustee prepares and files your income tax return for the year of bankruptcy and any outstanding prior years. In contrast, in a consumer proposal, you are responsible for filing all your tax returns.

CRA Overpayments and Consumer Proposals

With the introduction of the Canada Emergency Response Benefit (CERB) during the COVID-19 pandemic, many individuals received overpayments with little or no taxes deducted. This situation has led to unanticipated tax obligations for some, which a consumer proposal can address as long as no fraud was involved.

Interaction with the Canada Revenue Agency

Regardless of whether you filed a bankruptcy or a consumer proposal, you might need to interact with the CRA regarding your refund. Remember that, in either case, your trustee or proposal administrator doesn’t have the authority to speak to the CRA on your behalf. If you need to discuss the status of your refund, you can call the CRA’s insolvency line.

Provisional Tax Debt: What Is It?

A Provisional Tax Debt refers to any CRA debt relating to the period from January 1 of the year you filed your consumer proposal to the date you filed it. Depending on your situation, you may need to file separate tax returns for the pre-proposal and post-proposal periods.

Effect on Child Tax Benefits

Your child tax benefits and other benefits usually aren’t affected by the delay in processing your tax refund. As long as you file your return on time, you shouldn’t experience any interruption to your benefits.

Influence of Student Loan Debt on Your Refund

If you had student loan arrears at the time of filing your consumer proposal, your CRA refund for the year of filing will be applied to your student loan debt, regardless of when you completed your studies.

Conclusion

Understanding how a consumer proposal impacts your CRA refund is crucial to avoid any surprises during tax season. It’s also essential to remember that while a consumer proposal can provide substantial relief from debt, it’s not a one-size-fits-all solution. Always consult with a professional to explore all your options and choose the one that best fits your financial circumstances.

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