Income tax debt should not be ignored. It can quickly become unmanageable. If you fall behind on payments, interest charges and penalties will be added to your debt. If you do not pay, the Canada Revenue Agency (“CRA”) has broad powers to collect what you owe. The CRA can garnish your wages, seize your assets, freeze your bank accounts, or set off amounts you owe from one year against your tax refund in another year. Unlike other creditors, the CRA can use its authority under the Income tax Act to collect from you without having to get a court order first. The CRA is powerful and notoriously difficult to negotiate with. The good news is that an insolvency trustee has options to help you deal with the CRA and get relief from your tax debt.
A Consumer Proposal Can Deal With Tax Debt
Contrary to popular belief, tax debt can be included in a personal bankruptcy or a consumer proposal. In fact, other than immediate payment in full, personal bankruptcies and consumer proposals are the only two options the CRA will accept. Our Vancouver insolvency trustees have previously discussed how a consumer proposal differs from a personal bankruptcy. When it comes to tax debt, the key difference is this: bankruptcy eliminates most (if not all) tax debt but requires a surrendering certain of your assets, while a consumer proposal is an arrangement to repay debt (or a portion of your debt) to the CRA on more reasonable terms that fit within your budget.
How a Consumer Proposal Works
A consumer proposal is a formal insolvency proceeding that involves making an offer to all unsecured creditors to settle debts. In most cases, the proposal will be to pay a portion of the amount owed in monthly payments over a set time period. A consumer proposal is legally binding on all creditors once accepted. If you make the agreed upon payments, the remaining outstanding debt is forgiven at the completion of the proposal. For more information about how a consumer proposal can help resolve your debt, have a look at our insolvency trustee’s earlier discussion of the topic.
Consumer Proposal Stops CRA Collections
An important legal protection that comes with filing a consumer proposal is a “stay of proceedings.” This means that once you file a consumer proposal, collection actions by your creditors—including the CRA—must immediately stop. See here if you would like to know more about the potential benefits of a consumer proposal or better yet, contact our team of licensed trustees in Vancouver to discuss your unique financial situation.
Licensed Trustee Needed to File Consumer Proposal for Tax Debts
A Licensed Insolvency Trustee (“LIT”) is the only type of professional who can file a consumer proposal to deal with your tax debt. Your LIT will review your financial situation and help determine a reasonable proposal to put forward to your creditors, including the CRA. Your proposal will include all taxes you owe up to the day you file. Any tax debt that arises after the day you file your proposal is not included. Our Vancouver insolvency trustees have the experience to determine a fair offer that is likely to be accepted by your creditors. We are skilled in preparing all of the necessary paperwork, ensuring it is properly submitted, and we act as proposal administrator once your proposal has been accepted.
How Does a Consumer Proposal Work for Tax Debt?
Once you and your LIT have determined a fair offer that is manageable given your budget, the offer is sent to all of your unsecured creditors, including the CRA. A consumer proposal must be accepted by majority votes of your creditors based on the number of creditors and dollar value of their respective debts. If the required majorities of your creditors vote to accept your offer, then all are bound by the terms of the proposal, even if they didn’t vote to approve it. CRA debt has no greater priority over any other type of debt you may have—it all comes down to majority votes. For example, assume you owe $40,000 to two separate credit card companies and $10,000 to the CRA. Even if the CRA votes to reject your offer, your consumer proposal will be binding on all if both credit card companies vote to accept.
Conditions for CRA Acceptance of a Consumer Proposal
To increase the likelihood of gaining CRA approval for your consumer proposal, the following conditions are generally included as terms of the proposal (in addition to any additional or specific terms the CRA may require):
- You will file all tax returns up to the date the proposal is filed.
- You will file any tax returns that become due during the proposal period.
- You will pay all taxes owing during and after the proposal period (this makes sense, as your consumer proposal only includes taxes owing up to the date the proposal is filed; tax debt arising after that date must be paid as it becomes due).
- You agree that any refund arising from a CRA assessment or re-assessment for prior tax years must be applied to your outstanding debt.
Book a Consultation with a Licensed Insolvency Trustee
Relief from tax debt is possible when you work with a Licensed Insolvency Trustee. Vancouver’s Crowe MacKay & Company Ltd. can work with you to explore personal bankruptcy and consumer proposals, weigh the pros and cons, and put a plan in place to manage your financial situation. Contact us today to book a free consultation and discuss your situation.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice. If you require corporate or personal Insolvency services, Crowe MacKay & Company provides custom solutions for clients, allowing them to live debt-free.