Tax Refunds: Consumer Proposal vs. Bankruptcy

Tax Refunds In a Consumer Proposal or Bankruptcy

As we navigate the financial waters of life, we often encounter storms that challenge our financial stability. Some of these storms may result in us considering either bankruptcy or a consumer proposal. While both avenues can lead to debt freedom, they handle certain assets differently. One such asset is the tax refund. So, let’s delve into the intricate nuances of how tax refunds are treated in both scenarios.

Bankruptcy and Tax Refunds: The Connection

When you choose the path of bankruptcy in Canada, your income tax refund is categorized as an asset. In other words, should you declare bankruptcy, you forfeit any tax returns for that specific year. Furthermore, any refunds due from previous tax years are also redirected to your trustee.

Even if you modify a past return or seek a disability tax credit for any year leading up to your filing year, you won’t get those refunds. Even after you’ve completed your bankruptcy and become eligible for a disability tax credit, any refunds for the pre-bankruptcy years will be sent to your trustee.

Consumer Proposal and Tax Refunds: A Different Tale

Conversely, a consumer proposal deals with tax refunds in a different manner. When you opt for a consumer proposal, you negotiate an agreement with your creditors. One of the advantages of this arrangement is that you retain all your assets, including your tax refund. Thus, unless you owe back taxes, your tax refunds are safe when you file a consumer proposal.

However, if you owe the CRA any money from previous tax years at the time of filing, the situation becomes more complex. The CRA retains any refunds on income earned before your filing date and offsets these refunds against any outstanding debts you owe them.

Illustrative Example: Understanding the Fine Print

Consider you file your consumer proposal in February 2022 and have not yet filed your 2021 or 2022 income tax returns. When you file your 2021 taxes in April 2022, CRA will retain any refund to offset any tax debt included in your proposal. However, for your 2022 taxes, CRA will calculate how much refund they will retain and how much they will send to you. They will retain an amount proportionate to your pre-proposal period and send you the remainder.

This also applies to any tax credits or benefits you may be entitled to at the time of filing a consumer proposal. Essentially, CRA will offset any tax refund or credits due up to the date of your proposal against any tax debt included.

Who’s Responsible for Filing Tax Returns?

In a bankruptcy, your trustee is responsible for preparing and filing your income tax return for the year of bankruptcy and any outstanding previous years. Any refunds due are paid to your trustee and divided among your creditors.

In a consumer proposal, you are responsible for filing all tax returns. CRA requires you to have filed past tax returns before they accept a consumer proposal. They may request a commitment that you keep all future filings up-to-date and pay your taxes as they become due.

CERB Tax Debts and Consumer Proposals

The recent pandemic has brought about changes in how CERB overpayments are affecting Canadian insolvencies. Many individuals received CERB and CRB payments with minimal taxes deducted during the pandemic. Some even received both CERB and EI payments, leading to confusion.

If you find yourself in a situation where you owe taxes due to insufficient withholdings at source, or if you received notification for CERB ineligibility, you may be facing a sudden tax obligation you can’t pay.

A consumer proposal does handle CRA debts as long as no fraud was involved. If your income was high enough to trigger additional tax payments, this obligation can be included in a consumer proposal. It is also expected that the CRA will accept a settlement for CERB repayment in a consumer proposal, although this area is still developing.


Navigating the financial seas can be daunting, especially when dealing with tax refunds in the context of bankruptcy or consumer proposals. However, understanding the differences can help you make informed decisions about your financial future.

For more comprehensive information on how your tax refund would be treated in a bankruptcy or consumer proposal, don’t hesitate to reach out for a free, confidential consultation.

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