Managing your tax debt – is a Consumer Proposal right for you?

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

If you answered yes to one or more of the questions above, you may need help from a Licensed Insolvency Trustee (LIT). An experienced LIT can help you discover and understand your options to help resolve overwhelming tax debt issues and get you back on track.

One of the most common misconceptions from tax debtors is that tax debt cannot be included in a Bankruptcy or Consumer Proposal. Thankfully, tax debt is included in both and has no greater priority than any other debt.

What is a Consumer Proposal?

A Consumer Proposal is a formal insolvency proceeding and represents a new arrangement with creditors, providing the debtor an opportunity to repay debt – or a portion of debt – on more reasonable terms.

An immediate benefit of filing a Consumer Proposal is that all collection actions by creditors is stopped. In other words, if your wages are being garnished by the CRA of if your bank account is frozen, filing a Consumer Proposal will stop this action and provide you some quick relief.

Once a Consumer Proposal is filed, creditors have 45 days to consider the proposal. Generally, a Consumer Proposal will be accepted if a majority of the creditors who represent the most value of your debt, agree. If the CRA is a majority creditor, you will need their support for a successful outcome.

The CRA will likely agree to a Consumer Proposal as long as 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 the CRA creates a return on your behalf because you haven’t filed), you will be required to file proper returns before you can file a Consumer Proposal.

Future tax compliance

While a Consumer Proposal will deal with taxed owing up to the date of filing the proposal, it doesn’t deal with taxes owed after filing the proposal.

Your Consumer Proposal must contain a special clause stipulating that you agree to file future tax returns on time, make installment payments on self-employed income, and generally pay your taxes in a timely manner. 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 a provision in your Consumer Proposal 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

The CRA has access to your past earning history and will compare that to your reported current earnings so it’s important to accurately report your income. 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 a Consumer Proposal, the CRA will assess whether you are making the best offer given your circumstances. The agency will carefully review your income, expenses, assets, and other information to determine whether you are putting your best offer forwards, 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 a wide range of challenging income tax situations. If you are dealing with income tax debt and want to know your options, contact MNP for a free, confidential, no-obligation solution. The sooner you deal with the problem, the sooner you’ll get relief.