What Happens to my Tax Refund in a Consumer Proposal?

Many of the people I meet with in our London Ontario office have heard that if they file bankruptcy, they will lose their tax refund.  At this time of year especially, this can be stressful because many of us count on our tax refunds to get caught up on bills, complete car repairs, buy our kids summer clothes, etc.  Unfortunately, if you file bankruptcy, it’s true. You will lose a tax refund.  In fact, depending on when you file, you could lose more than one.  (For example if you file bankruptcy on April 1, and haven’t done your taxes yet, you will lose your refund this year AND next year.)

If, however, you file a consumer proposal, you get to keep your tax refund.  So, if you generally get a good sized return each year, it may make sense to look at a proposal as an alternative to bankruptcy.

Speaking of taxes, one thing that we will explain to you when you meet with us, is the continued importance of filing taxes.  If you are in a consumer proposal and don’t file your taxes, this can actually interfere with the proposal itself.

Another point to consider is this:  income taxes are debts that are included in a consumer proposal.  So, if you owe money to Canada Revenue, you should consider a proposal, as this can help you deal with that type of debt as well.

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4 thoughts on “What Happens to my Tax Refund in a Consumer Proposal?

  • Allen H

    Good day,

    I’m wondering if you could shed some light on my current situation. I currently am in a consumer proposal filed in February 2017. When I filed my 2016 taxes last year in May 2017, the refund went to the balance that I owed the CRA. The remaining balance was later included with my proposal by June of 2017.

    I’ve recently net-filed my 2017 taxes and after confirming that my CRA balance owed was at zero (confirmed with a CRA agent, as well as an accounts receivable agent), and have been waiting just over 16 business days (3 weeks) for my return. My question is have you ever heard of a Tax return being delayed due to a person filing a consumer proposal? And has that person who filed the consumer proposal, who had a balance previously owing to the CRA, had their refund applied to the previous balance owing even though it was included in the consumer proposal?

    • J. Douglas Hoyes

      Hi Allen. Yes, I hear this story all the time. Unfortunately it is not uncommon for CRA to put a “flag” on your file, showing that you are insolvent. Sometimes their internal system does not distinguish between a proposal or a bankruptcy. In your case, you don’t owe CRA anything, so you should be entitled to your refund. However, they won’t release the refund until the “flag” is lifted, and that may not happen until a human being at CRA looks at the file and releases the refund. I suggest you have your trustee contact CRA and ask them to release your refund. That should solve the problem.

  • Melanie

    I have a question similar to this but different…
    If a person is in the middle of a consumer proposal process…the process was started in February 2018, and this person did their taxes online and was supposed to receive $900. The $900 was deposited into a bank account whose debts were included in the consumer proposal, however the bank KEPT the tax refund and distributed the payments towards the debts linked to that account…
    Is the bank allowed to keep that tax return or is there a way to get it refunded back since that bank account was already included in the proposal?

    • J. Douglas Hoyes

      Hi Melanie. This is a question you should ask your trustee. My general advice to everyone filing a consumer proposal is to open a new bank account at a new bank, where you don’t owe any money, so this doesn’t happen. However, what you describe is not uncommon, because unless you remember to notify CRA of your new bank account, they will send it to the bank account they have on file, which in this case was your old bank account. It may be possible for your trustee to contact the bank and request that they return the money; that will take a while, and there is no guarantee of success, but that would be my advice in your situation.


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