If you have significant tax debt owing to the Canada Revenue Agency (CRA) you may be looking for a way to reduce or eliminate this debt. Filing a consumer proposal can result in you paying a reduced amount to the CRA. Filing for bankruptcy can also eliminate tax debt. These are the only ways to quickly reduce the overall amount of tax debt. In some rare instances, the CRA may grant relief from penalty or interest. This relief is only granted in situations that prevent you from meeting your tax obligations such as:
- extraordinary circumstances (natural disasters, civil disturbances, serious health considerations);
- actions of the CRA (an error or delay that caused tax to accrue); or
- financial hardship at a level approaching poverty.
However it is important to note that even if you qualify for relief, the CRA only forgives penalties and interest, never the underlying principal amount. Furthermore, the relief program is a long and arduous process that can take up to two years to resolve However, in most cases, you can include the tax debt that you owe in a consumer proposal.
Consumer Proposals & Tax Debt
In order for tax debt to be included in a consumer proposal, the following must be included in the conditions of the proposal:
- Tax returns must be filed up until the date of the proposal.
- All tax returns that become due during the proposal period must be filed.
- If taxes are re-assessed and a refund is due, this refund must be applied to the outstanding debt.
- A consumer proposal can only include taxes owed prior to the proposal date, so any taxes that become due during the proposal period must be paid as they become due.
The CRA may require additional terms in specific situations. In order to file a consumer proposal, you must work with an insolvency trustee who will act as your proposal administrator.
Insolvency Trustees and Consumer Proposals
A consumer proposal is a legal process where you make an offer to all of your unsecured creditors to pay them on terms that you can afford. In most cases, this involves paying a portion of the debt that you owe in monthly payments over a set period of time. A consumer proposal allows you to pay back some of the debt that you owe and have the remaining outstanding debt be forgiven at the completion of the proposal. As mentioned, a consumer proposal can only be filed by a licensed insolvency trustee (who also acts as a proposal administrator in consumer proposal situations.) Most trustees offer a free consultation where they will review your financial situation and provide you with the options available to you. One of these options may be a consumer proposal. If this is the way you choose to proceed, your trustee will ensure that all of the required paperwork is completed and submitted. The trustee will also determine what a fair offer to your unsecured creditors will be. This offer is sent to all of your creditors, including the CRA if you have tax debt, who will then vote on whether or not to accept the offer. If the majority of your unsecured creditors vote to accept the proposal, then all are bound by the terms of the proposal. It is then up to you to make the agreed upon payments.
Tax Debt Relief & Consumer Proposal
Paying back income tax debt can be expensive and put a big financial strain on your life. If you have high levels of tax debt, you may fall behind on payments, which can lead to big interest charges and penalties. The CRA can even garnish your wages, seize your assets or freeze your bank accounts if you do not pay. A consumer proposal can help you reduce the amount of tax debt that you owe. Once your proposal is accepted, all legal action and wage garnishments from all unsecured creditors must stop. This includes CRA wage garnishment. Therefore, speaking with a trustee and discussing how a consumer proposal can help with tax debt could be a good idea for you if you are in a situation where you cannot pay your taxes.