Income Tax And Consumer Proposals

Navigating Income Tax and Consumer Proposals: A Guide to Managing Tax Debt

Are the demands of the Canada Revenue Agency (CRA) in terms of repaying your income tax debt causing you stress? Are you concerned about a frozen bank account or wage garnishment by the CRA? If you find yourself in such a predicament, a Licensed Insolvency Trustee (LIT) could provide the assistance you need.


Note: It’s a common misconception that tax debt can’t be included in a bankruptcy or a Consumer Proposal. But, the reality is that tax debt is treated the same as any other debt in these processes.


Exploring the Option of a Consumer Proposal

A Consumer Proposal is one potential solution for individuals struggling with tax debt. It’s an official insolvency process that establishes a new payment agreement with your creditors, allowing you to repay your debts under more manageable conditions.

The act of filing a Consumer Proposal initiates a “stay of proceedings”, which effectively halts all collection actions by your creditors. This can provide immediate relief if the CRA has frozen your bank account or begun garnishing your wages.

After filing a Consumer Proposal, your creditors have a 45-day window to review and consider its terms. Usually, a Consumer Proposal is accepted if creditors representing the majority of your debt value agree to the terms. If the CRA is your primary creditor, their approval is crucial.

Key Considerations for a Successful Consumer Proposal

In my experience, the CRA generally agrees to a Consumer Proposal if certain conditions are met.

Completion of Income Tax Returns

The CRA will not approve a proposal if any income tax returns remain unfiled. Even if the CRA has raised notional assessments (i.e., creating a return for you due to lack of filing), it’s necessary to file all due returns before the Consumer Proposal.

Compliance with Future Tax Obligations

Your Consumer Proposal only covers taxes due up to the date of filing the proposal. It does not address future tax obligations. Therefore, your proposal should include an agreement to file future tax returns promptly, make instalment payments on self-employed income, and pay your income taxes on time.

Provision for the Current Year’s Taxes

The CRA will permit you to include a provision for the income tax you will owe in the current year (up to the date of filing the proposal) in your Consumer Proposal. You will need to provide your LIT with the necessary information to calculate your year-to-date taxes owed.

Accurate Income Disclosure

Ensure that your income is accurately reported. The CRA will compare your past earning history with your reported current earnings. If your current earnings are less than they were last year, you need to provide a valid explanation for the reduced income.

Fair and Reasonable Terms

The CRA will scrutinize your Consumer Proposal to determine if it reflects your best offer under the circumstances. This involves reviewing your income, expenses, assets, and other pertinent information. Your LIT can guide you on how to manage your cash flow during this process.

Navigating through the complexities of income tax debt can be daunting. However, with the help of a Licensed Insolvency Trustee (LIT), you can effectively manage an unmanageable income tax situation. For a free, confidential, no-obligation consultation, don’t hesitate to contact us. The earlier you address your tax debt issues, the sooner you can find the relief you need.

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