Filing a CRA Consumer Proposal for Tax Debt
September 29th, 2022 by A Licensed Insolvency Trustee
A Licenced Insolvency Trustee can tell you whether this solution will work in your specific case. If you are a debtor and are insolvent, consumer proposal or bankruptcy can be used to pay off CRA tax debt as well as other unsecured debts. Or, if you are still keeping up with your bills in general but are having trouble with the CRA debt specifically, options for resolving your income tax debt may include negotiating payment terms with the CRA, or getting a personal loan for the amount of the tax debt.
The following is general information on including CRA income tax debt in a consumer proposal.
Can a Consumer Proposal Help with Tax Debt?
Can tax debt be included in a consumer proposal? Yes, a consumer proposal can clear your CRA income tax debt. Thousands of Canadians have benefitted from the relief a consumer proposal can give from a financial situation that includes tax debts. The rules around consumer proposals and bankruptcies are embodied in Canada’s Bankruptcy and Insolvency Act, and there is no rule against clearing income tax debt with these tools.
What about small business tax debt?
A common way that consumers get into debt with the CRA is by operating a small business. If you are a sole proprietor or are in a simple partnership, this debt is still personal debt and can be cleared with a consumer proposal.
In a typical scenario, the CRA (Canada Revenue Agency, formerly Revenue Canada) is not the only creditor a small business owner owes – often there are outstanding debts to banks, credit cards and other lenders that the business operator has used to support business operations during difficult times when there has been limited revenue.
How to Ensure the CRA Will Accept Your Consumer Proposal
In Canada, both bankruptcies and consumer proposals must be administered by a professional known as a Licensed Insolvency Trustee (formerly called a Bankruptcy Trustee or insolvency Trustee). This ensures that the consumer proposal paperwork will be completed diligently by a person who understands what creditors, including CRA, will accept, and under what circumstances.
Because a Trustee prepares the paperwork to file the consumer proposal, you can be confident that your proposal will be attractive to your creditors. However, it will be helpful if you understand a few basic facts about what the CRA requires in order to accept a consumer proposal.
- Just as with other creditors, the CRA will require that they receive more money with your consumer proposal than they would if you filed for personal bankruptcy. In addition to this, the CRA has a certain minimum “cents on the dollar” amount that they will accept. Your Trustee will have up-to-date information on this.
- If the CRA is simply one among several creditors to whom you owe unsecured debts, then their vote on your proposal only counts in proportion to the percentage of your total debts that they are owed. If the CRA votes no, but the other creditors do not vote no, your proposal will be deemed accepted and will proceed. However, if CRA is your only or your major creditor, holding 50% or more of your total unsecured debts, then they will have the controlling vote. In this situation, your Trustee will take extra care to write a proposal CRA will accept – and you may have to make a more generous proposal in order for it to be accepted.
The Trustee’s Role
A Licensed Insolvency Trustee has a part to play in both the crafting of your consumer proposal before it is filed, and the administration of your proposal after it is accepted.
During the filing process, your Licensed Insolvency Trustee will ask you for details of your financial situation: your income and expenses, and your assets and debts. With this information, the Trustee can assemble an accurate financial profile. Your financial profile assists both in determining a reasonable monthly payment that you can manage, and giving your creditors an accurate picture of your situation.
It will take one or more meetings with the Trustee to get the paperwork fully prepared and signed by you. At that point, the Trustee files the consumer proposal with the Office of the Superintendent of Bankruptcy.
Benefits of filing a consumer proposal
On the date of the filing, many of the benefits of your consumer proposal kick in. Your creditors can no longer legally contact you directly – inquiries must go to the Trustee. Also, any legal actions, wage or bank account garnishees, or debt collection activities will cease. If you have questions or issues regarding your protections, your Trustee can advise you or take action on your behalf.
What happens when creditors accept your consumer proposal
Once the proposal has been accepted by your creditors, it will be deemed accepted by the Court and your proposal payments will begin. In most cases, a schedule of monthly payments is arrived at that will take five years to complete. Your Trustee will receive the payments, which will cover both the dividend to the creditors and the Trustee’s fees (which are set by the government).
When you have completed your payments (and one of the advantages of a consumer proposal is that you can pay it off early), your Trustee will prepare a Certificate of Full Performance, give you a copy and submit a copy to the Office of the Superintendent of Bankruptcy.
Note that you may also send copies of your Certificate of Full Performance to the credit bureaus yourself to expedite an improvement to your credit rating.
How to Get Income Tax Debt Help
Don’t delay on taking action for debt relief if you have insolvency problems and the CRA is a major creditor. Consumer proposal filings involving the CRA need special care, but in most cases they are successful. Bankruptcy can also resolve CRA income tax debt.
Your first step is to set up a free first appointment with a Licensed Insolvency Trustee in your area. This will be a confidential consultation. Together you can review your financial situation and determine the best solution, whether it is credit counselling, debt settlement, consumer proposal or bankruptcy.
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