Key Takeaways
When you file a consumer proposal, you will still be responsible for filing all past and future tax returns. You can keep future tax refunds except for the year of filing the consumer proposal if your tax debts were included in your consumer proposal.
Navigating financial challenges can be overwhelming, and many Canadians turn to a consumer proposal to regain control of their finances. While this legal debt-relief solution offers numerous advantages, it can also raise questions about its impact on various aspects of life, including tax obligations. In this blog, we’ll explore what a consumer proposal is, how it works, and its implications on your tax return in Canada.
What is a Consumer Proposal?
A consumer proposal is a legally binding agreement between you and your creditors facilitated by a Licensed Insolvency Trustee (LIT). It allows you to settle unsecured debts for less than the full amount owed while avoiding bankruptcy.
Under this agreement, you make affordable monthly payments over a specified period, typically up to five years. Consumer proposals are designed for individuals with unsecured debts of up to $250,000 (excluding mortgages on a principal residence).
Key Features of a Consumer Proposal
Debt Relief: Reduces your debt to a manageable amount
Legal Protection: Stops collection calls, wage garnishments, and lawsuits
Asset Retention: Unlike bankruptcy, you can keep most of your assets
Credit Impact: Negatively impacts your credit score but is less severe than bankruptcy.
How a Consumer Proposal Affects Your Tax Obligations
Taxes are an essential part of financial planning, and a consumer proposal can directly and indirectly affect your tax return. Below, we’ll examine these impacts in detail:
1. Addressing Tax Debt
One significant benefit of a consumer proposal is its ability to include tax debt owed to the Canada Revenue Agency (CRA). If you have unpaid taxes, penalties, or interest, these amounts can be negotiated as part of the proposal.
Reduced Tax Liability: You may pay less than the full amount owed, easing the burden of large tax debts.
Frozen Interest and Penalties: Once the proposal is accepted, the CRA stops charging interest and penalties on the tax debt.
2. Filing Your Tax Returns During a Consumer Proposal
While under a consumer proposal, you remain responsible for filing your annual tax returns. The CRA requires timely submission of your returns to track your financial progress.
Filing and Paying Taxes: Continue preparing and paying your taxes during the consumer proposal to avoid tax debt.
No Retroactive Filing Relief: If you're behind on filing returns, a consumer proposal does not erase the requirement to file returns for previous years. You'll need to catch up on outstanding filings, and the amounts owed could be included in your proposal.
3. Tax Refunds and Credits
During the consumer proposal, your tax refunds will likely be affected, but only for the filing year.
Tax Refund Redirection: The CRA will apply any refunds you are entitled to towards your outstanding tax debts included in the consumer proposal, such as personal taxes or government overpayments.
Tax Refunds: The CRA will only keep your tax refund for the tax year you filed your consumer proposal. You will keep all future year's tax refunds.
How to Manage Tax Obligations During a Consumer Proposal
Successfully navigating taxes during a consumer proposal requires proactive financial management.
1. Stay Compliant
File all required tax returns promptly.
Ensure accuracy to avoid CRA audits or disputes.
2. Budget for Payments
Include your consumer proposal payments in your monthly budget.
Factor in potentially no tax refunds for the first year after filing your proposal when planning finances.
3. Work with Your Trustee
Your LIT can provide guidance on tax-related matters, including filing back tax returns.
Why is a Consumer Proposal Helpful for Tax Debt?
For individuals from small to significant tax liabilities, incorporating these debts into a consumer proposal offers distinct advantages:
Simplifies Repayment: Combines tax debts with other unsecured obligations into a single monthly payment.
Legal Protection: Stops aggressive collection actions from the CRA, including wage garnishments and bank account freezes.
Financial Relief: Negotiated settlements can significantly reduce the amount you owe, providing breathing room for other expenses.
You can learn more in her post: Will The Canada Revenue Agency (CRA) Accept My Consumer Proposal?
Does a Consumer Proposal Erase Tax Debt Entirely?
No, a consumer proposal does not erase tax debt. It provides a structured way to settle the debt for less than the full amount while stopping interest and penalties. Upon completion of the proposal, all tax and unsecured debts are forgiven and no longer collectible by the CRA.
Conclusion
A consumer proposal offers Canadians a viable alternative to bankruptcy for managing debt, including tax obligations. While it may temporarily impact receiving a tax refund and require careful financial planning, it provides a clear path to financial recovery. By understanding how a consumer proposal affects your tax return and working proactively with your Licensed Insolvency Trustee, you can navigate the process smoothly and emerge in a stronger financial position.
If you’re considering a consumer proposal, consult with a Litvack Group to explore your options and ensure you make informed decisions about your financial future.
FAQs
1. Can tax debt be included in a consumer proposal?
Yes, tax debt owed to the CRA can be included in a consumer proposal along with other unsecured debts.
2. Will I lose my tax refund during a consumer proposal?
Only if you owe taxes to the CRA and for the tax year you filed the consumer proposal. If you don't owe taxes to CRA and file a consumer proposal, you will keep all tax returns.
3. Do I still need to file taxes during a consumer proposal?
Absolutely. Filing your tax returns on time is essential to avoiding further tax debt.
4. How long does a consumer proposal stay on my credit report?
A consumer proposal typically stays on your credit report for three years after completion or six years from when it started, whichever occurs sooner.
5. Can I negotiate tax debt directly with the CRA?
The CRA generally does not negotiate directly with individuals but will accept settlements through a consumer proposal.
6. Does a consumer proposal cover GST/HST debt?
Yes, GST/HST debts are considered unsecured and can be included in a consumer proposal.
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