Can My Tax Debt Be Reduced With A Consumer Proposal?

Can I reduce tax debt with a consumer proposal

If you are dealing with tax problems, one way to deal with Canada Revenue Agency (CRA) is with a consumer proposal filed through a Licensed Insolvency Trustee.

CRA will not accept a negotiated settlement arranged directly between a taxpayer and Canada Revenue Agency for less than the full tax balance owing. While there are fairness provisions that may permit CRA to cancel or waive penalties and interest, there must generally be extenuating circumstances to qualify and you will still be liable for the underlying tax debt. That makes a consumer proposal a viable alternative when looking to reduce tax debt obligations to CRA.

Many people assume that because taxes are a government debt, they are not included in a consumer proposal.  This is not the case.  Subject to a few conditions, Canada Revenue Agency is treated the same as other debt in a consumer proposal such as your credit cards.

Underlying Conditions for Approval

Based on our experience, Canada Revenue Agency will only consider your consumer proposal if all of your outstanding tax returns have been completed.  If you have, or had a business, Canada Revenue Agency wants those outstanding returns filed in order to confirm how much you owe.

Just like other creditors, Canada Revenue Agency is looking for the best deal they can get.  This means that you must offer more than they would get if you were to file for bankruptcy.  If, for example, you have assets with a cash value of $20,000, they will not agree to a consumer proposal of less than $20,000.

In order to accept your consumer proposal, Canada Revenue Agency will typically require a few additional terms be added to the consumer proposal:

  • You will be required to confirm that all of your future income tax returns will been completed and any tax installments and liabilities will be paid on time;
  • Any refunds due to you prior to the proposal, and for the tax year the proposal was filed, will be used to offset your tax liability; and
  • If you have a tax appeal in process, you agree to cancel it.

The consumer proposal will only include income taxes up to the tax year before you filed.  If you file your consumer proposal in March 2016, only the income tax owning up to 2015 are included.  You will be responsible for filing and paying for the entire year that you filed (2016 in this example).

Exceptions

There are 2 exceptions when Canada Revenue Agency will not reduce their debt with a consumer proposal.

  • If you were self-employed and had employees, Canada Revenue Agency will not include the source deductions in a consumer proposal. A portion of this debt is consider trust money (money you deducted from your employees to pay to Canada Revenue Agency) and they may still expect you to pay it back.
  • If Canada Revenue Agency filed a tax lien on your house, and you decide to keep your house, the tax lien does not go away with a consumer proposal. They may agree to suspend collection on the debt while the consumer proposal is ongoing, but once the consumer proposal is complete, you will still need to pay the tax lien.

CRA will consider your intentions and actions prior to making to proposal when determining how they will vote and how much they will ask for. If you have made an honest attempt to keep up with your tax returns and payments they are much more likely to look upon your proposal favourably. If they feel you have been negligent in paying taxes for your own personal benefit, they may ask for a higher payout percentage before voting yes.

We have seen recently an increase in the number of Canadians talking to a licensed insolvency trustee about tax debts incurred as a result of their participation in a tax scheme involving deductions that were rejected by CRA. In many of these instances a consumer proposal became a way of resolving their tax problems with CRA.

A licensed insolvency trustee will work with you to develop a proposal that is fair and reasonable and will satisfy Canada Revenue Agency and your other creditors. Contact a licensed insolvency trustee in your area to review this option for dealing with outstanding tax debts.

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