Consumer Proposal and Taxes

Can you include money owing to Canada Revenue Agency in your consumer proposal? The simple answer is yes but there are some considerations.

Tax Debts Are Just Like Any Other Unsecured Debt

Just like credit card debt and unsecured lines of credit, tax debts, personal income tax and HST, are unsecured debts and subject to bankruptcy and consumer proposals. When I tell people this, often I am asked how I know because they thought income taxes were exempt from bankruptcy. I explain that I used to work for the Canada Revenue Agency and specialized in Bankruptcy and Proposals for the last ten years there. Therefore, a bankruptcy or a consumer proposal will erase tax debts.

Debts Owing As Of Previous Year End Included

Amounts owing for taxes to CRA are only automatically included up to the end of the previous year.

For example, if you file a proposal on February 1, 2016, all taxes owing are included up to the end of the previous year, 2015.  On February 1, 2016 you may not yet have filed your 2015 tax return, but that’s fine; when you file your taxes for 2015, those taxes will be included.  (Obviously you will want to file your taxes as soon as possible so that CRA is notified).

What happens if you file a consumer proposal in the middle of the year, say in July?  In that case your taxes for the prior year are included, but any amounts you owe to the government for the period January through July would not be included.  That’s different than what happens in a bankruptcy, because in a bankruptcy a tax return is done as at the date of bankruptcy, and all taxes owing up to the date of bankruptcy are included.

If you expect to owe a significant amount of taxes for the current year, it is possible for your consumer proposal administrator to prepare a “pre proposal tax return estimate” and submit it to CRA.  If the proposal is accepted, and if the numbers are reasonable, they will accept that “pre-proposal” amount as part of your proposal.  Here’s the key:

The tax “return” for the current year pre-proposal period was not truly a tax return. It was an estimate of the taxes owing for the portion of the year before the date of the proposal. Though it was submitted to the Canada Revenue Agency (CRA) for their review, it was not actually assessed by the government.

The purpose of doing this estimate is so that the amount owing can be included in the consumer proposal. A consumer proposal automatically includes income tax debts only from all prior years, as noted above.

You are still responsible for filing a normal return for the full year by the regular deadline of April 30. Once the CRA assesses that return, they will subtract the pre-proposal amount from the total amount owing. If the pre-proposal amount had not been estimated, you would be responsible for paying the full amount owing for all of  the current year.

Requirements to Pay for Tax Debts can be Stopped

Just like legal action by other creditors, Requirements to Pay issued to an employer or a bank must be removed when you file an assignment in bankruptcy or file a consumer proposal. If you are self employed and a Requirement to Pay has been issued to accounts receivable for either employee source deductions or HST prior to your filing, these Requirements to Pay will remain in effect. That is the only exception. The other important fact is a Requirement to Pay to the Bank for tax debts is in effect for ninety (90) days, so if you continue to deposit into the bank account after a Requirement to Pay is issued, the money will be lost and any cheques or automatic debits will be returned by the bank. You need to address these Requirements to Pay and not ignore them.

It’s also important to act swiftly if you see that you’re unable to pay your tax debts. The government has the power to tie your debt to a secured asset. Once that is done, it’s much more difficult to deal with your tax debts.

For further information in your specific situation we suggest you contact a consumer proposal administrator for a no charge initial consultation.

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4 thoughts on “Consumer Proposal and Taxes

  • Robert MacGregor

    I am a lawyer and have a client who filed a consumer proposal in mid 2013. His debts consisted of credit cards and taxes as well as a personal loan and secured debt on his residential property. No creditors including CRA responded to the proposal and it was accepted by the Superintendent. He was able to pay the required amount well within the prescribed payment period.

    Due to a very stressful matrimonial situation the client got behind on his CRA filings. He did not file either income tax or GST returns for 2013, 2014 and 2015. On my advice he did file for 2016 in order not to attract a penalty.

    He now estimates that he owes in excess of $100,000.00 in unpaid taxes. My question is – can he now make another consumer proposal with respect to the taxes. He does not have any other debt except the secured debt against his home.

    • J. Douglas Hoyes

      Yes, if the first proposal was completed, you can file a second time for new debts. Your client must file his outstanding taxes before filing the proposal, otherwise CRA will either not accept the proposal, or they will create an arbitrary assessment, which is not in your client’s best interests.

  • Roseanne

    So i filed for consumer propsal in oct 2018 and i did my tax for 2018 i owed income tax 3300 and they took it so my propsal i had to redo my income tax for 4 yesrs back so 2017 i was suppost to get back 3700 they took it and put it towards my propsal i thought they couldn’t do that

    • J. Douglas Hoyes

      Hi Roseanne. Legally you are correct, they can’t do that, but it is CRA’s standard practice, if you owed taxes in your proposal, to keep your tax refund (up to the amount owing for prior years) in the year you filed your proposal (2018 in your case). Your trustee can explain CRA’s approach in more detail.


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