If you have tax debt and can’t afford to pay it, one option for dealing with this debt is to file a consumer proposal. Some advantages of filing a consumer proposal are:

Canada Revenue Agency will often accept less than the full amount of the tax debt owing.

If your tax debt is less than 50% of your total unsecured debts, CRA may be forced to accept the proposed terms as long as your other creditors vote in favour of them.

Stops all interest charges on the date of the proposal.

Prevents collection activity and wage garnishments by CRA once the proposal is filed.

Generally speaking, a consumer proposal enables you to negotiate your tax debt obligations without going bankrupt.

While it’s true that income tax debts can be included in a consumer proposal, it is important to note that when you file a consumer proposal, the Canada Revenue Agency (CRA) has some special rights with respect to your income tax refunds.

The ‘right of set-off’ means that if you owe money to CRA and they owe you an income tax refund they can keep your income tax refund and apply it toward your outstanding debt.

The CRA can only apply a ‘right of set-off’ toward your income tax refund relating to the year in which your consumer proposal was filed and any prior years for which you are owed a refund.

The CRA cannot apply a ‘right of set-off’ against future income tax refunds relating to the tax years after the year in which your consumer proposal was filed.

For example, if you file a consumer proposal in 2017 the CRA would apply a ‘right of set-off’ against your 2017 income tax refund (and any prior years 2016, 2015, 2014…), but the CRA cannot apply a ‘right of set-off’ against your 2018 income tax refund.

Please note that if you are considered a high tax debtor (anyone that files personal bankruptcy and owes the CRA in excess of $250,000) you are not eligible to receive an automatic discharge from bankruptcy and must obtain your discharge from the court. A CRA representative will attend the court hearing and your discharge may be made conditional upon additional payments being made. 

If you have tax debt and need help, contact our office today for a free, no-obligation consultation.

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