Will Canada Revenue Agency (CRA, formerly Revenue Canada) accept a consumer proposal? Yes, they will, but only if certain conditions are met. Today I’ll explain the four most important “tricks” or tests that you must meet for a successful consumer proposal when CRA (the Tax Man) is involved. It’s important to understand that while creditors like credit card companies and banks will almost always accept a reasonable proposal, CRA has their own set of rules, so they may not accept a proposal that would be acceptable to other creditors.
Why is CRA more “difficult” than other creditors? As many representatives of CRA have told me in the past, “Revenue Canada did not choose to be one of your creditors.” That’s true. You filled out a credit application with the bank, or the credit card company, and they decided to grant you credit. CRA never had the chance to make a credit decision; you didn’t pay your taxes, and now you owe them money, and that’s why they are never happy about being a creditor in a proposal.
My name is Douglas Hoyes, and as the co-founder of Hoyes, Michalos & Associates Inc., one of the largest consumer proposal administrator firms in Canada, I have administered thousands of successful consumer proposals over the last 15 plus years, and I have had many proposals accepted by Revenue Canada, allowing debtors to avoid bankruptcy in Canada, and based on my experience, there are the four tests you must meet to get a consumer proposal accepted by CRA.
1 First, as is the case with all creditors, you must offer more than they would receive in a bankruptcy, you must offer them a minimum return (they won’t accept one cent on the dollar, even if it is more than bankruptcy), and you must demonstrate that you can make the proposal payments. I described these requirements in detail in my post on What Will My Consumer Proposal Cost, so I won’t repeat them in detail here.
2 The second test you must meet is the up to date test. CRA will automatically reject your proposal if all of your tax returns are not filed up to date. That makes sense, because it’s impossible for Canada Revenue Agency to know how much you owe if you haven’t filed your taxes. So, if you call my consumer proposal office and say you have tax debts and you want to file a consumer proposal, my first question will be quite simple: “Have you filed all of your tax returns?” If you haven’t, I’ll tell you to file them, and then call me back, because I know it’s impossible to get CRA to accept a proposal while there are tax returns outstanding.
3 The third test you must meet is what I call the honourable citizen test. This is a phrase I made up, but in my experience with CRA it’s very important. If Revenue Canada does not believe you have behaved in an honourable and honest manner, they will not accept your proposal, even if you are offering what would otherwise appear to be an acceptable amount of money.
I have had cases where the person went five years without filing taxes. They then filed them, so they met the requirements of Test #2, the up to date test, but CRA was not happy about the fact that they didn’t file taxes for five years. In my experience CRA representatives understand that there are cases where Canadians can’t pay their taxes, perhaps due to job loss, business failure, medical issues, or whatever. What they never understand is why you didn’t file your taxes. It’s not that complicated (in most cases), everyone else in Canada is required to do it, so why didn’t you?
If you are perpetually late filing taxes, they assume you are not an honourable citizen, and that makes it much less likely that they will accept your proposal.
4 The fourth and final test you must meet is the I promise to stay up to date test. You owe taxes because you either didn’t file your taxes on time, or didn’t pay them, or both. CRA may be willing to give you a break and accept your proposal, but only if they are confident that in the future you will file on time, and pay on time. How can you convince them that you will stay up to date?
If filing taxes was a problem in the past, showing that you now have an accountant helping you will help.
If paying was the problem, you must agree to make installment payments so that when you file your taxes next year, nothing is owing. You may be a “quarterly remitter”, meaning you are required to make installment payments every three months. In my experience CRA will be much happier if you make installments every month, or even more frequently (weekly, bi-weekly, or semi-monthly if that’s how you get paid at your job).
To prove that you are trustworthy, it’s wise to include a clause in your proposal demonstrating your commitment to staying up to date. Here are the standard clauses that I include where tax debts are a significant debt in the proposal:
The Debtor confirms that all tax returns will be filed as due, and that all required tax installments will be made when due. If tax returns and installments are not prepared and paid when due, such breach will be considered a default in the terms of this proposal.
In simple terms, this means that if you file your tax returns late, or if you don’t pay your required installments, CRA can kill the proposal.
To summarize, it is possible to file a successful consumer proposal even if CRA is a large creditor. However, before you file you must ensure that the proposal makes sense, and is affordable, and that all of your taxes are filed, and that you can demonstrate the ability to file and pay your taxes when due in the future.
For more information, please read my posting on consumer proposals and taxes. If you have debts, including tax debt, and you want to find out if a consumer proposal may be the solution for you, arrange a no-charge initial consultation by contacting a licensed consumer proposal administrator today.