Consumer proposals and the CRA

April 23rd, 2008 by Questions

Hi there,

My mom is considering filing a consumer proposal. She has approximately $90,000 in total debt – including $20,000 in personal income tax and $30,000 in corporate income tax. The balance comes from a personal loan and a relatively small amount of consumer debt.

She also has $250,000 equity in a home she doesn`t live in and can`t sell (it`s actually my grandmother`s house – but ownership was unwisely transfered to my mom and her sisters many years ago – as part of an estate planning strategy). The total value of the home is $750,000 – but my mom has only one-third ownership.

I`m in a position to reduce her total debt load by paying-off her personal income tax ($20,000).

My mom has a good pension – which pays her $62,000 per year. She still works part-time, earning another $20,000 per year. Here`s the problem: The CRA is garnishing her wages to the tune of $2,000 per month (based only on the $20,000 owing in personal income tax) – which makes it difficult to meet her monthly financial obligations.

Is a consumer proposal a reasonable option in this situation? If so, should I first pitch-in and reduce her debt to an amount below $75,000?

We`re also concerned about disclosing my mom`s partial ownership of my grandmother`s house – for obvious reasons.

My mom stands to inherit a healthy sum of money in the coming years – so this will all be a moot point eventually. But in the short-term, the CRA`s collection actions make it difficult to meet her financial obligations.

So, I guess I have two questions:

1. Is a consumer proposal a reasonable solution?
2. Should I pay down her total debt to an amount below $75,000, before filing the proposal (I assume yes, if we hope to protect against bankruptcy and and danger to my grandmother`s house)?

Thanks so much for any advice you can provide.


One Response to “Consumer proposals and the CRA”

, Barton Goth GCO Bankruptcy Trustees said:

The first thing that jumps out at me is the equity in your mother’s house. If she were to file a proposal it would have to be to pay all the debts in full plus the administration costs. This is directly related to the equity in the house as regardless of which province you live in, if she files for bankruptcy here creditors would get paid in full as a result of all this equity.

Second, there is no value in you paying down the tax debt as there is a type of proposal that will work in your mothers situation, it is called a Division 1 proposal. It is essentially the same as a consumer proposal except that if it is not accepted or your mother doesn’t live up to the terms of the proposal then there is an automatic bankruptcy that occurs.

However, the one thing that concerns me is that when you do a proposal to pay the debts in full it can cost a fair amount in terms of administration fees. As such it may be cheaper for your mother to take out a second mortgage on her house, or look at a consolidation loan or something along those lines as it may end up being cheaper for her.

So I would encourage her to look into these options prior to sitting down with a local trustee .

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