Income Tax And Consumer Proposals – Tips On Managing Tax Debt

Do you have income tax debt and are you concerned about your ability to repay it? Is the Canada Revenue Agency (CRA) demanding repayment terms that you cannot afford? Has the CRA frozen your bank account or begun garnishing your wages?

If you have answered yes to one or more of the above, you may need help from a Licensed Insolvency Trustee (LIT). As an experienced LIT, I help people discover and understand the options they have to resolve their pressing tax debt issues.

One of the most common misconceptions I hear from tax debtors is that tax debt cannot be included in bankruptcy or a Consumer Proposal. The good news is that most tax debt is included in bankruptcy or a Consumer Proposal and has no greater priority than any other debt.

A Consumer Proposal is one option available to tax debtors. A Consumer Proposal is a formal insolvency proceeding and represents a new arrangement with creditors, providing the debtor an opportunity to repay his or her debts – or a portion thereof - on more reasonable terms. An immediate benefit of filing a Consumer Proposal is that a “stay of proceedings” happens, which means collection action by creditors is stopped. In other words, if your wages are being garnished by the CRA or if your bank account has been frozen, filing a Consumer Proposal will stop this action and provide you with relief.

Once a Consumer Proposal is filed, creditors have 45 days to consider the proposal. Generally speaking, a Consumer Proposal will be accepted by the creditors provided that a majority in dollar value of the creditors agree. If the CRA is a majority creditor, you will need their support for a successful outcome.

See how easy is it to make a Consumer Proposal to the CRA? In my experience, the CRA will agree to a Consumer Proposal in most circumstances, provided the following issues are adequately addressed.

Unfiled Income Tax Returns

The CRA will vote against any proposal where there are unfiled income tax returns. Even if the agency has raised notional assessments (i.e., where CRA creates a return on your behalf because you have not filed), you will be required to file proper returns before you file a Consumer Proposal.

Future Tax Compliance

While the Consumer Proposal will deal with taxes owing up to the date of filing your proposal, it does not deal with taxes that you must pay after filing the proposal. Your Consumer Proposal must contain a special clause stipulating that you agree to file your future tax returns in a timely manner, make instalment payments on self-employed income and generally pay your income taxes on time. If you are a tax debtor, your LIT should include this special clause when preparing your proposal.

Provision for Current Year’s Taxes

The CRA will agree to allow you to include in your Consumer Proposal a provision for the income tax you will owe in the current year, up to the date of filing your proposal. The LIT will ask you to provide the information needed to calculate the year-to-date taxes owing.

Accurate Income Disclosure

Is your income accurately reported? The CRA has access to your past earning history and will compare your past earnings to your reported current earnings. If your current earnings are less than they were last year, ensure you provide the LIT with proper information to explain the reason for the reduction.

Fair and Reasonable Terms

When considering your Consumer Proposal, the CRA will consider whether you are making your best offer in the circumstances. The agency will carefully review your income, expenses, assets and other information to determine whether you are putting your best offer forward (versus trying to pay as little as possible). This may require a reduction of some non-essential spending during the term of your proposal. Your LIT can give you tips and pointers around how to better manage your cash flow.

Dealing with the CRA and income tax debt can feel scary and overwhelming, but an LIT has the tools to help you deal with an unmanageable income tax situation. If you are dealing with income tax debt and want to know your options, contact us for a free, confidential, no-obligation consultation. The sooner you deal with the problem, the sooner you will find the necessary relief.