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The Canada Revenue Agency And Consumer Proposal Arrangements

You may already be familiar with the Canada Revenue Agency, aka “The Taxman”.  The CRA is mandated to administer tax, benefits, and related programs, and ensure compliance on behalf of governments across Canada.  The CRA collects tax money owed by Canada’s 38-Million citizens and residents, collects GST/HST from self-employed individuals and corporations and provides revenue to our government. 

One unique way the CRA collects tax revenue is through the Consumer Proposal negotiation process. And although the CRA is treated just like any other unsecured creditor, it is also capable of flexing its muscles when it has control over the Consumer Proposal itself, as is the case when it is a larger creditor or where the acceptance or rejection of the proposal rests solely in the hands of the CRA (normally as the only organization owed money). 

Because a Consumer Proposal is a “new” contract drawn up between the debtor and any institutions who are owed money (the creditors) it is open to negotiation during the settlement process. There can be many different types of settlement offers put forward to unsecured creditors in a proposal.  But unlike most creditors, the CRA has a requirement that specific terms and rules be included in the Consumer Proposal to satisfy them.  Otherwise, they might refuse to accept the terms of the Consumer Proposal.

Some of the terms required by the CRA include an obligation of the debtor to keep all tax remittances and filings up to date during the proposal period (normally five years), to not fall more than $5,000 (or two months) behind on Consumer Proposal payments (and a 30-day window to correct this or the Consumer Proposal will be “deemed annulled”) and the requirement to file a pre-Proposal provisional tax return. A provisional claim is an estimate of tax liability. It normally covers the period from January 1st of the year of filing until the date of the actual filing of the Proposal.

Without a provisional claim, the entire year of tax owing to the CRA in a Consumer Proposal is treated as outside the scope of the Consumer Proposal and excluded..  That amount would then be fully collectible by the CRA. In many cases this could result in the debtor being unable to meet the terms of their Consumer Proposal and (ultimately) the death of the proposal itself.

Lately, the CRA has included a new clause in some Consumer Proposals: The Income escalation clause.  The debtor is requested to provide the Trustee with a copy of a personal income tax return within a 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 be required to pay a certain percentage of the difference between the total Income less the benchmark income after income tax is deducted for that year. The CRA uses an income escalation clause in cases where a debtor’s income fluctuates significantly from year to year  (such as self-employed individuals).

For anyone who has recently had an encounter with the CRA and might be suffering under a wage garnishment or bank account freeze due to taxes owed, please reach out to our Insolvency professionals.  We will put a stop to all CRA legal action and as your partner in the process we will negotiate a fair and affordable settlement offer to reduce your stress and help you get your life back.