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.