Can you reduce tax debt with a consumer proposal?

Feeling overwhelmed by CRA tax debt and the maze of forms, credits, deductions and benefits? If you're having difficulties managing tax debt, you can reduce what you owe to the CRA by filing a consumer proposal through a Licensed Insolvency Trustee (LIT). A consumer proposal is a helpful debt relief option where a LIT negotiates with all your creditors on your behalf—the CRA included—to cease collection efforts and attempt to reduce your total amount owing while freezing interest.

Can you include tax debt in a consumer proposal?

Yes! A consumer proposal is one of the few ways to formally address CRA tax debt. Not all debt relief options are legally binding, and they won’t all stop interest or collection actions. Tax debt owed to the CRA is considered unsecured debt, allowing you to include it in your consumer proposal alongside other obligations like credit card balances, lines of credit, and payday loans. CRA tax debt is especially common for those who are self-employed. A consumer proposal can be a great option because it settles your debts for less than what you owe while freezing interest and protecting important secured assets like your home and vehicle.

How will a consumer proposal impact future tax returns?

Unlike bankruptcy, a consumer proposal won’t impact future tax returns. One advantage of a consumer proposal is its minimal disruption to annual tax filings, refunds, and credits, making it a more appealing option for many individuals.

However, it’s crucial to stay up to date on tax returns. Your consumer proposal will only include taxes up to your official filing date. This means that any previous year of income tax, benefit overpayment, or late fees will be included, but the current year will only be prorated to the date of filing. For example, if your proposal starts in June, you’ll only incur further income tax debt for June-December, or half of the year.

A consumer proposal also means you’re eligible to keep future refunds.

Does the CRA get preferential treatment when negotiating a consumer proposal?

No. Even though they’re a government entity, the CRA is treated like any other creditor during a consumer proposal. The power of a creditor’s vote to accept or refuse a proposal is determined by their share of your total debt. So, in terms of voting power the CRA is equal to all other unsecured creditors included in your proposal. The only exception is if the CRA has placed a lien on any of your assets to secure the debt. In this scenario, a consumer proposal will not be effective in addressing this particular debt. Find out if bankruptcy may be a better option for you by speaking with one of our LITs.

How do you get the CRA to accept your consumer proposal?

In a consumer proposal, you work with your LIT to create a debt repayment plan, which is then presented to your unsecured creditors, like the CRA. If the majority of creditors—based on the dollar value of the debt they’re owed—vote in favour of your proposal, it becomes legally binding for all.

The CRA typically imposes stricter conditions compared to other creditors. Many people who file consumer proposals with CRA debt owe a substantial amount, which gives the CRA significant sway over the terms of the proposal. To ensure your offer is taken seriously, you should incorporate specific CRA debt forgiveness clauses in your proposal. These include:

• Filing all outstanding tax returns up to your proposal’s filing date.

• Submitting all required tax returns by the deadline while participating in your proposal.

• Paying all taxes owing during your proposal period by the deadline.

The chances of the CRA accepting a consumer proposal with these conditions is higher than if you were to file for bankruptcy. Put simply, the CRA needs to see a financial benefit in voting “yes” to your proposal. Your LIT will help you maximize the likelihood of your proposal being approved.

Will I keep my tax refund during a consumer proposal?

Generally, yes. If you have no outstanding CRA tax debt, you won't have to forfeit any tax refunds when submitting a consumer proposal. The CRA will apply any tax refund or credits owed to you—for the year of your proposal filing—against any tax debt included in your proposal. Although a consumer proposal can extend up to five years, this offset is only applicable for the year you file your proposal. Any future tax refunds for income earned after your consumer proposal remain yours to keep.

What happens if I don’t pay my income tax debt?

As a government entity, the CRA has special permissions to garnish wages and assets. They can even go after your spouse or other family members if you’ve transferred assets to them within the past 12 months. It can feel overwhelming to deal with a government creditor—that’s why LITs are so helpful. We’re here to help you get a financial fresh start, no matter who your creditors are. We’re the only professionals legally allowed to negotiate with the CRA on your behalf to reduce your tax debt and stop the cycle of garnishment and interest.

Call today or book a free consultation to find out how a consumer proposal can help you get out of debt and other financial difficulties.