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It is a fundamental purpose of the Bankruptcy and Insolvency Act (the “BIA”) to provide for the financial rehabilitation of insolvent persons.

The Bankruptcy and Insolvency Act permits an honest but unfortunate debtor to secure a discharge, so that he or she can make a fresh financial start and resume his or he place in society as a useful citizen, free from the crushing burden of debt. If the CRA holds a swing vote in a Consumer Proposal, or where the acceptance or rejection of the proposal rests solely in the hands of CRA, CRA will normally refuse a proposal if the debtor is proven to be not “honest but unfortunate”.

What constitutes a debtor who is not “honest but unfortunate”? The followings are typical examples:

  • High-income earners who abuse the insolvency system to avoid paying tax;
  • Using tax money for personal purpose;
  • Letting the taxman stand last in line;
  • Using bankruptcy as a financial planning tool;
  • Whether significant transfer under values were conducted to defeat interests of creditors prior to filing.

Consumer Proposal Terms

A Consumer Proposal is, in reality, a “new” contract between the debtor and his/her creditors. There can be a variety of plans put forward in a Consumer Proposal even though the Consumer Proposal has to be made to the unsecured creditors in general. However, it is not surprising that the CRA requires certain terms to be included in the Consumer Proposals in which CRA has a swing vote.

Learn more in frequently asked questions about Consumer Proposals.

Consumer Proposal Compliance

Compliance terms start with Division 1 proposal and are now common in the Consumer Proposal.

The terms developed by the CRA are as follows:

The debtor covenants and agrees that during the course of the Proposal he shall:


a). Keep all fling, remittances and installments, if any, to Canada Revenue Agency current and also meet all of his obligations to all other post filing creditors as they become due until issuance of the Certificate of Full Performance. Should the debtor fall into arrears by:

  1. More than $5,000 and
  2. More than 2 months

and should the Trustee be notified in writing of such arrears, the Trustee may then request that the Inspectors declare the proposal to be in default, or alternatively, request that the Inspector temporarily waive such default based on the investigation of the underlying circumstances.


b). Upon notice in writing to the Trustee by Canada Revenue Agency or any post filing creditors, of a default during the post-proposal period as outlined under paragraph (a), the Debtor shall be given 30 days from the date of the notice to rectify any such default . Should the default not be rectified within the 30-day period, a request can be made to the Trustee to have the Consumer Proposal annulled.

Find out what is the difference between a Division 1 Proposal and a Consumer Proposal.

Provisional tax return

CRA policy requires that the pre-proposal amount within the year of the proposal be provided and takes the position that if these figures are not received at the time of sign-up and a full year tax return for current fiscal year are not filed prior to the income tax deadline of next fiscal year, the entire year, and debt arising for taxes, will be treated as outside the proposal. If the assessed amount for the Provisional Period exceeds the liability calculated in the provisional return prepared, the excess will not be included in the proposal and must be paid.

A provisional claim is an estimate of tax liability. It covers the period beginning at the tax debtor’s current fiscal year start (usually January 1) and ending on the date of the filing of an Notice of Intention to file Proposal or proposal, whichever is earlier.

Without a provisional claim, the entire year of the proposal is treated as post proposal, and therefore, excluded from the proposal, and is fully collectible by CRA. In many cases this could result in the debtor being unable to meet the terms of the proposal and ultimately having the proposal fail.

Income escalation

Income escalation clauses are new trends we see in the Consumer Proposal. The debtor is requested to provide the Trustee with a copy of his/her personal income tax return within certain time limit every year until the completion of the proposal. If the debtor’s total income is greater than the benchmark income, the debtor shall pay certain percent of the difference between the total Income less the benchmark income after income tax deducted for that year. CRA uses income escalation clause in the cases where the income of the debtor fluctuates significantly.

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