Taxes and debt relief are two of the most complex aspects of Canada’s financial system. Going through a debt management process like a consumer proposal or bankruptcy is tricky as is, but it’s made even more difficult when considering how they change your tax filings and refunds. This blog will demystify the connection between a consumer proposal, bankruptcy, and your tax refund, explaining how they interact with each other and what to keep in mind during tax season.
How a Consumer Proposal Impacts Your Tax Refund
You should not be losing any tax refunds as a result of your consumer proposal filing.
If you find yourself missing out on a tax refund after filing a consumer proposal, it’s from taxes owed from previous years. The CRA will offset owed tax money by garnishing your tax refunds and benefits. This also applies to other government debts.
What’s important to note is that you may not even know you owe tax money until being notified by the CRA. Withholding taxes is not always purposeful on the consumer’s part.
Owed tax money can result from:
- Unpaid dues from when you did file your taxes.
- Not filing your taxes in previous years.
- Filing errors resulting in an incorrect refund.
Any outstanding personal income tax debt up to the date you file your consumer proposal is treated as an unsecured debt and can be included in your proposal. This means you can negotiate this debt along with your other obligations through your consumer proposal.
While your Licensed Insolvency Trustee (LIT) plays a crucial role in the consumer proposal process, you remain responsible for filing your own tax return as usual. The LIT does not automatically handle this for you, so it is essential to stay proactive with your tax filings.
How Bankruptcy Impacts Your Tax Refund
There are specific regulations for filing tax returns and determining where any refunds are directed during a bankruptcy. Refunds generated from your post-bankruptcy tax return are typically directed to your LIT. The Trustee will then make these funds available to your creditors as part of the bankruptcy estate.
Read More:
- Switching from Bankruptcy to Consumer Proposal in Canada
- Consumer Proposal vs Bankruptcy – How to Choose Wisely in 2025
Something that makes bankruptcy really different from a consumer proposal is that, during bankruptcy proceedings, the LIT is responsible for filing multiple income tax returns for you. To describe this, let’s imagine you filed for bankruptcy in April 2024. This is how your LIT would file your return:
- A tax return would be filed from the period before bankruptcy (January-April 2024)
- A tax return would be filed for after the bankruptcy started (May 2024-December 2024)
Declaring bankruptcy protects you from having to pay personal income tax debt accumulated before your bankruptcy filing. This same protection extends to any prior year tax returns. However, the CRA still has the authority to offset any refunds from these periods against the taxes you owe. Your refund on a pre-bankruptcy or prior year tax return would typically be withheld to cover your tax debt.
Please note that if you owe taxes on a post-bankruptcy tax return, these are considered new debts that you are required to pay. They are not covered by the bankruptcy protection.
This ensures that your tax situation is managed accurately and according to Canada’s legal framework. When you are in a bankruptcy, your tax return is treated differently than it usually would be, and as such, your pre-bankruptcy and post-bankruptcy period must be separated.
When will I start receiving tax refunds again after filing for Bankruptcy?
Once you’ve been discharged from bankruptcy, your LIT will no longer be given your tax refund to distribute to creditors. The tax refund will be sent directly to you from that point on.
In Canada, you are usually discharged from bankruptcy 9 months to 36 months after filing, the length depends on your circumstances.
Tax Refunds in Consumer Proposal vs. Bankruptcy
The main reason many Canadians choose a consumer proposal over a bankruptcy is that it places less restrictions on your income and assets, and the way each treats your tax refund reflects that. One advantage of choosing a consumer proposal over bankruptcy is that you can retain your tax refunds. In bankruptcy, any tax refund you receive will be given to your creditors (any creditor, not just the CRA) to offset your debts.
If you’re seeking debt relief but have yet to choose between filing a consumer proposal or bankruptcy, we can help!
We’re a consumer-first debt advocacy organization whose goal is to help Canadians understand their debt relief options, as well as all the obligations that come with them. We don’t want to make the decision for you, we just want to give you the knowledge and understanding to make an informed decision for yourself.
We build a lifetime partnership with our clients, supporting their journey to a life without debt. Our financial literacy aftercare program was built to ensure you get out of debt — and most importantly — stay out!
