If you owe money to the Canada Revenue Agency (CRA), you may be wondering whether it can be included in a consumer proposal. A consumer proposal is a formal debt settlement process governed by the Bankruptcy and Insolvency Act that allows you to legally reduce and restructure unsecured debts.
The short answer is yes, CRA tax debt can be included as part of a consumer proposal.
In this article, we’ll guide you through how the consumer proposal process works with the CRA, why they might reject a proposal, and how to get started. Keep reading to understand the next steps.
Does the CRA Accept Consumer Proposals?
Yes, the CRA frequently accepts consumer proposals.
In a consumer proposal, the CRA is no different from any unsecured creditor. Once they receive your proposal, they review your financial situation and vote on the proposal. Acceptance is often determined by what they would likely recover if you filed for bankruptcy instead.
Basically, if the CRA would receive a higher repayment from you in a consumer proposal than if you were to file for bankruptcy, they are more likely to accept the proposal. Likewise, if the amount is not sufficient, they can vote to reject the proposal.
Note: Keep in mind that just because the CRA votes to reject the proposal doesn’t mean the proposal will not go through. All creditors have the opportunity to vote on whether to accept or reject a consumer proposal, and each vote is weighted according to the proportion of debt they hold within the proposal.
What CRA Debts Will a Consumer Proposal Help With?
A consumer proposal can help you repay the following CRA tax debts:
- Outstanding personal income tax balances from previous years.
- GST/HST liabilities for self-employed individuals and small business owners.
- Employer payroll remittances and required source deductions.
- Any penalties or accumulated interest related to these debts.
Other debts that are fraud-related, or involve a tax return that has yet to be filed, will not be accepted as part of a consumer proposal.
Additionally, if your tax debt exceeds $250,000 (excluding your mortgage on a principal residence), you may need to file a Division I Proposal instead of a standard consumer proposal.
When the CRA Will Accept a Consumer Proposal
The CRA is more likely to accept a proposal when:
- You are up to date with your tax filings
- Your income and expenses are reasonable and documented
- The proposal offers a better recovery than bankruptcy
For example, let’s say you owe $48,000 in income tax and GST debt. In bankruptcy, the CRA would likely recover only $8,000 of the total amount owed. Your consumer proposal offers $18,000 over five years. Because this exceeds what they would receive in bankruptcy, the CRA would be more likely to vote yes.
When the CRA Will Reject a Consumer Proposal
The CRA may reject a proposal if:
- You have not filed all outstanding tax returns
- Your income appears understated
- The offer is too low compared to bankruptcy recovery
- You have a history of repeated filings
For this example, let’s say you owe $60,000 in tax debt but have not filed returns for the past two years. Your consumer proposal offers to repay $10,000 total, but the CRA believes your reported income can support a repayment amount of $17,000.
In this case, the CRA would likely reject the proposal because the filings are incomplete and the offer does not reflect his repayment capacity.
What Happens Once the CRA Accepts a Consumer Proposal?
Upon acceptance, your consumer proposal becomes legally-binding for both you and your creditors. Collection calls, wage garnishments, and any other legal action against you stops. Additionally, debt will stop accumulating interest.
Once the consumer proposal is completed, the remaining tax balance, as well as any other debts tied to your proposal, is legally eliminated.
For the consumer proposal to remain valid, you must continue to make one fixed monthly payment consistently. If you miss a payment, the consumer proposal becomes invalid, and any collection actions or legal actions related to your debt can resume. Interest on the debts will start accumulating once again.
How Do I Get Started?
To get started with a consumer proposal for CRA tax debts, please book a consultation with 4 Pillars here.
4 Pillars is a debt advocacy service with locations across Canada. What makes us different from other debt help companies is that we don’t have any obligations with your creditors. LITs, for example, are obligated to ensure fairness for both the debtor and creditor.
As a debtor-focussed organization, our goal is to help you understand your rights, legal debt relief options, and what risks are associated with various methods of debt relief.
While a consumer proposal is a great way to relieve yourself of CRA tax debt, it’s important to understand what impact a consumer proposal can have on your credit first. It’s also important that you know about alternative options like credit counselling, debt consolidation, and bankruptcy.
In our consultation, we can discuss these options in depth to help you make the best decision for your financial situation.
If you determine a consumer proposal is the best option for you, we’ll connect you with a trusted LIT to help you draft the proposal. Afterward, we can offer credit rebuilding programs and other services to help you overcome the aftermath of a consumer proposal.
Why Informal Debt Settlements Won’t Reduce Your CRA Debt Obligations
Informal debt negotiation is a common practice in Canada, and a valid strategy to have your agreement terms re-negotiated. The results vary, but a creditor may agree to a new payment plan that involves a lower interest rate or a reduction in the total amount owed.
However, informal debt settlements are not a viable option when dealing with CRA debt. Generally, the CRA won’t agree to a lesser amount than what’s owed unless it’s a consumer proposal or bankruptcy. Federal tax laws prohibit the CRA from forgiving debt via informal debt settlements.
Note: Informal debt settlements can be risky since negotiations aren’t legally-binding.
Why Choose a Consumer Proposal for CRA Debt?
CRA debt can be significantly more damaging than other forms of debt. As part of the government, the CRA has extraordinary collection powers; they can garnish wages and freeze your bank account without needing a court order.
That’s why it’s important to take action as soon as possible.
A consumer proposal is often the preferred option over bankruptcy for several reasons:
- You Stop CRA Enforcement Immediately: The moment a proposal is filed, a legal “stay of proceedings” takes effect. A stay of proceedings will stop any wage garnishments, interest accumulation, collection calls, frozen bank accounts, or other legal actions.
- You Reduce the Principal: The CRA will not negotiate a reduction of your tax debt informally. A consumer proposal, however, can legally reduce the total amount you owe, and the reduction can be significant in many cases.
- You Avoid the Asset Consequences of Bankruptcy: In bankruptcy, you may need to relinquish certain assets that your LIT will then use to repay creditors. With a consumer proposal, all of your assets are protected and can’t be acquired by your LIT or creditors for repayment.
- It Has a Smaller Impact on Your Credit: Both a consumer proposal and bankruptcy will have a long-term impact on your credit. However, a consumer proposal leaves only a R7 rating, while bankruptcy leaves a more severe R9 rating on your credit report.
- Payments Are Predictable and Based on Affordability: Your proposal payment is structured around what you can realistically afford after reviewing your income and essential living expenses.
- It Gives You a Clear Path to Debt Relief: Your consumer proposal will specifically state how much you’ll pay, how long you’ll pay, and when the debt will be gone. Knowing exactly when you’ll be relieved of your debts can help you stay motivated and be less stressed about your financial future.
- It’s a Proactive Strategy: Relying on limitation periods or informal payment arrangements leaves room for risk and can leave you stressed and uncertain. CRA debt can grow quickly with penalties and interest, and enforcement can escalate without warning. However, a consumer proposal resolves the issue directly. Instead of reacting to collection pressure, you’re implementing a structured legal solution with a defined outcome.
Frequently Asked Questions About CRA Debt and Consumer Proposals
Can the CRA garnish my wages because of unpaid tax debt?
Yes, the CRA can garnish your wages due to unpaid tax debt, and unlike other creditors, they do not require a court order to garnish wages. They can issue a requirement to pay (RTP) directly to your employer or bank without warning. An RTP document states that a portion of your income is now payable to the CRA.
To avoid wage garnishment, it’s important that you take action to resolve CRA debts as soon as possible. If you’re unsure how to proceed, book a free, confidential consultation with us to discuss available debt relief options.
Can I include CERB or benefit overpayments in a Consumer Proposal?
In most cases, yes. Government benefit overpayments are typically treated as unsecured debts and can be included in a consumer proposal.
Do I need to file all my tax returns before filing a consumer proposal?
Yes. Generally, all outstanding tax returns must be filed before a proposal can be accepted by the CRA.
