Tax Debt in a Consumer Proposal

A consumer proposal, (up to $250,000 in debt), or a Division 1 Proposal (over $250,000 in debt), are the only possible methods to get Canada Revenue Agency (CRA) to agree to a tax debt settlement and to accept less than the full amount owing. An assignment in bankruptcy will also eliminate taxes owing to CRA.

It is important that you consult with a Licensed Insolvency Trustee before taking any action. A licensed professional will be able to assist you and advise you on the best course of action. With the help of an insolvency professional, you can learn more about the options that are available and figure out which one is the best solution for your situation.

Outstanding income taxes, HST, PST, GST and payroll taxes can rapidly become very expensive due to penalties and interest and the longer you wait to pay them, the more expensive things can get. Some people avoid filing or attempting to pay their taxes because they are overwhelmed by the amount of debt and this can result in a number of problems. Revenue Canada can seize your assets, garnish your wages, freeze your bank accounts or register liens against your property if they are owed taxes. There is no way to run away from the problem.

If you are in this position, you need to realistically consider if and how you will be able to pay these debts. Keep in mind that if you haven’t paid your taxes on time, penalties and interest charges could apply and grow. These can make it even more complicated to pay back what you owe. 

Dealing with Tax Debt by Filing a Proposal

A consumer proposal is the only federal government tax program that offers relief and allows the CRA to settle your tax debts for less than the full amount owing. The arrangement made, however, must be better than what they would receive if you were to file an assignment in bankruptcy protection.

In order for the CRA to accept a tax debt reduction through your consumer proposal, the proposal must include the following conditions:

  • All tax returns must be filed and up to date prior to the filing of the consumer proposal.
  • All tax returns due during the proposal period must be filed when due.
  • All taxes outstanding during the proposal period must be paid as they become due. The consumer proposal will only include taxes owing prior to the proposal date.
  • In the event that taxes for prior years are re-assessed and a refund is due, that refund must first be applied to Revenue Canada’s outstanding indebtedness.