Can A Consumer Proposal Reduce Or Eliminate Tax Debts Owed To The CRA?

Posted in Consumer Proposals | Comments Off on Can A Consumer Proposal Reduce Or Eliminate Tax Debts Owed To The CRA?

If you’re struggling with tax debt owed to the Canada Revenue Agency (CRA) you might feel like there’s no way out. The CRA is known for being a powerful creditor with aggressive collection powers, such as wage garnishments, bank account freezes, and liens on property.

Individuals struggling with repayment often seek debt relief solutions. The good news is that there is a legal and manageable way to deal with overwhelming CRA debt: a consumer proposal.

Understanding Tax Debt and CRA Collections

Tax debt occurs when individuals or businesses owe money to the CRA due to:

• Underpaying taxes throughout the year.
• Failing to file returns on time.
• Self-employed individuals not remitting tax installments.
• CRA reassessments increasing the amount owed.
• Accrued penalties and interest on overdue amounts.

Unlike other types of debt, tax debt can be aggressively pursued by the CRA, which has strong collection powers. The CRA can:

• Garnish wages or bank accounts.
• Place liens on assets, such as homes or vehicles.
• Seize property if tax debt remains unpaid.

 What is a Consumer Proposal?

A consumer proposal is a formal, legally binding process under the Bankruptcy and Insolvency Act (BIA). It allows individuals with debt up to $250,000 (excluding mortgage debt) to negotiate a settlement with creditors, including the CRA. This process is facilitated by a Licensed Insolvency Trustee (LIT)—the only professionals legally authorized to administer consumer proposals.

Key features of a consumer proposal:

• Debt reduction – You may only pay a portion of what you owe, often 30–50% of the original amount.
• Fixed monthly payments – The payments are structured over up to five years, making repayment more manageable.
• Protection from creditors – Once filed, creditors—including the CRA—must stop collection actions, such as wage garnishments.
• No interest accrual – Once accepted, tax debt stops accumulating interest and penalties.
• Avoiding bankruptcy – It provides debt relief without full insolvency, allowing individuals to keep assets.

What Types of CRA Debt Can Be Included?

Since tax debt is unsecured, it qualifies for reduction through the proposal. You can include most types of CRA debt in a consumer proposal, such as:

• Personal income tax debt (owed due to underpayment, inaccurate filing, or penalties).
• Business-related tax debt (if you’re personally liable).
• Unpaid GST/HST (for self-employed individuals or business owners).
• Payroll deductions (for business owners who failed to remit employee taxes).
• Penalties and interest (from overdue taxes).

However, not all tax debts are automatically covered. Certain CRA-related debts cannot be eliminated in a consumer proposal, such as:

• Debts arising from fraud or tax evasion
• Court-imposed fines
• Certain restitution orders

In addition to these exclusions, there are other limitations to keep in mind, which can include the following:

• Secured Debts Are Not Included – If the CRA has already placed a lien on assets (such as a home or vehicle), the debt becomes secured, and a consumer proposal cannot remove the lien.
• Future Tax Debts Are Not Included – Only tax debts that exist at the time the proposal is filed are included. Any new tax debt you incur after filing (e.g., from the current or future tax years) is not covered and must be paid in full.

Why the CRA May Accept a Proposal

Even though the CRA has strong collection powers, they may still accept a consumer proposal for several reasons:

1. It often offers a better financial return than bankruptcy.
   The CRA assesses whether it would recover more money through a consumer proposal compared to bankruptcy. In many bankruptcy cases—especially when an individual has few assets—the CRA may receive little to nothing, as the debt could be fully discharged. A consumer proposal, on the other hand, usually offers higher or more consistent payments, making it a more favorable option for the CRA.
2. It’s a structured repayment plan.
    The CRA appreciates the structure and legal enforceability of consumer proposals, as they show a genuine attempt to resolve the debt. It provides a fixed monthly payment over a period of up to five years, making it easier for individuals to repay their tax debt without accumulating additional penalties or interest.
3. It reduces administrative burden.
    A proposal allows the CRA to recover money without ongoing enforcement and legal processes.

CRA’s Role in Accepting a Consumer Proposal

The CRA does not automatically accept consumer proposals. It reviews each proposal carefully on a case-by-case basis and may reject offers if they believe they will recover more through collections or bankruptcy.

Factors the CRA uses for their review:

• Repayment percentage –They assess whether the proposed repayment amount is reasonable.
• Tax filing compliance – They may reject proposals if past tax returns were not filed or if there is a history of non-compliance. They may reject your proposal or delay voting on it until all filings are up to date.
• Prior insolvency history – If an individual has filed for bankruptcy or a previous consumer proposal, CRA may be stricter.
• Earnings and financial situation – CRA evaluates whether the individual could afford to pay more outside a proposal. This includes your income and ability to repay and the value of your assets.
• The percentage of debt being repaid in the proposal compared to what would be recovered in a bankruptcy or other methods of collection. The agency may accept a consumer proposal for tax debts if it believes the proposal offers a better financial return than bankruptcy or other collection methods.

The CRA is often one of the largest creditors in a consumer proposal, and because of this, they can influence the outcome. If they hold more than 25% of your total debt, their vote can be decisive in whether the proposal gets accepted or rejected.

To improve your chances for getting the proposal approved:

• Ensure all tax returns are up to date before filing the proposal.
• Offer a reasonable repayment amount.
• Cooperate fully with the LIT.

What Happens After a Consumer Proposal is Accepted?

Once approved:

• The CRA and other creditors cannot take further collection action.
• The individual makes fixed monthly payments as agreed.
• No additional interest or penalties accumulate.
• After full completion, the remaining balance is legally discharged.

However, a consumer proposal does affect credit scores. It remains on credit reports for three years after completion. Individuals must rebuild financial standing through responsible money management.

Alternatives to a Consumer Proposal for Tax Debt

If a consumer proposal isn’t viable for your unique financial situation, there are other potential solutions which may include:

1. Negotiating a payment plan with CRA – The agency may allow installment payments over time.
2. Applying for taxpayer relief – CRA may waive penalties or interest in cases of financial hardship.
3. Debt consolidation loans – Combining multiple debts into one manageable payment.
4. Bankruptcy – If tax debts are overwhelming, bankruptcy may be necessary.

A Powerful Legal Option for Tax Debt Relief

CRA tax debt can be scary and overwhelming, especially when penalties and interest start piling up or when your wages or bank accounts are threatened.

A consumer proposal is one of the best ways to manage and reduce tax debts owed to CRA. It  is a powerful, government-approved solution that can help you reduce or eliminate your tax debt while protecting your assets and giving you a clear path forward.

If you’re struggling with CRA debt, your first step should be to speak with a Licensed Insolvency Trustee. LITs are the most reliable professionals when it comes to managing CRA tax debts through formal debt relief solutions. They are licensed by the federal government and have the legal authority to negotiate with the CRA on your behalf. Working with a Licensed Insolvency Trustee (LIT) ensures proper negotiations and increases the chances of getting approved.

Contact Richard Killen
FREE No Commitment Consultation

Recent Blog Posts

• Can a Licensed Insolvency Trustee Advice on Budgeting Tips?
• What is the Role of a Licensed Insolvency Trustee in Managing CRA Tax Debts?
• Can A Consumer Proposal Reduce Or Eliminate Tax Debts Owed To The CRA?
• How is a Consumer Proposal a Viable Alternative to Bankruptcy in Canada
• Can You Adjust a Consumer Proposal