Can CRA Tax Debt Be Included in a Consumer Proposal?

TL;DR

CRA tax debts can be included in a consumer proposal. This applies to personal income tax, GST/HST assessments, penalties, and interest. CRA is treated as an unsecured creditor under the Bankruptcy and Insolvency Act (BIA) and must participate in the proposal process. Filing a consumer proposal immediately stops CRA garnishments, bank account freezes, and other collection actions through the Stay of Proceedings.

Types of CRA Debt That Can Be Included

Not all tax obligations are the same, but the vast majority can be included in a consumer proposal:

Personal income tax. This is the most common type of CRA debt included in consumer proposals. Whether your debt arose from unfiled returns, reassessments, or simply being unable to pay, personal income tax is an unsecured debt that is fully eligible.

GST/HST assessments. If you owe GST/HST as a self-employed individual or small business operator, this debt can be included. However, GST/HST collected from customers and not remitted (known as trust amounts) may be treated differently — your Licensed Insolvency Trustee will advise on the specifics.

Penalties and interest. All CRA penalties and interest charges on included debts are covered by the proposal. Once filed, no further interest or penalties accrue on the included amounts.

Canada Pension Plan (CPP) and Employment Insurance (EI) arrears. If you are self-employed and owe CPP or EI contributions, these can generally be included.

Source deductions. If you are a business owner who failed to remit employee source deductions (income tax, CPP, and EI withheld from employee pay), these are considered trust debts. They can be included in a consumer proposal, but CRA may argue for higher recovery on these amounts since they are deemed to have been held in trust.

How CRA Participates in the Proposal Process

CRA is treated as an unsecured creditor under the BIA. Here is how the process works:

1. Your LIT files the proposal. The proposal is filed with the Office of the Superintendent of Bankruptcy and served on all creditors, including CRA.

2. Stay of Proceedings takes effect. Immediately upon filing, CRA must cease all collection actions — garnishments, account freezes, liens, and legal proceedings are all stopped.

3. CRA reviews the proposal. CRA's insolvency unit evaluates the proposal based on their internal guidelines. They assess whether the proposed recovery is reasonable compared to what they would receive in a bankruptcy.

4. Creditor vote. CRA votes along with your other creditors. A majority by dollar value must accept the proposal. If CRA holds more than 50% of your total debt, their vote effectively decides the outcome.

5. Amended terms (if needed). If CRA rejects the initial offer, your LIT can negotiate amended terms. CRA may request a higher payment percentage or a shorter term. Most proposals are successfully negotiated to terms that CRA will accept.

What CRA Can Do Before You File

CRA has powerful collection tools that make tax debt particularly stressful. Understanding these helps explain why a consumer proposal can be so effective:

Wage garnishments (Requirements to Pay). CRA can issue a Requirement to Pay directly to your employer, requiring them to send a portion of your wages (or even your entire paycheque) directly to CRA. Unlike other creditors, CRA does not need a court order to garnish your wages.

Bank account freezes. CRA can issue a Requirement to Pay to your bank, freezing your account and redirecting funds to CRA. This can happen without warning.

Liens on property. CRA can register a lien against your home or other property for unpaid tax debts.

Legal action. CRA can certify your debt in Federal Court and pursue enforcement through legal proceedings.

A consumer proposal stops all of these actions instantly through the Stay of Proceedings. If you are currently facing CRA collections, filing promptly can prevent significant financial disruption.

CRA's Voting Behaviour

CRA has a reputation for being a difficult creditor in consumer proposals, but this reputation is somewhat overstated. In practice, CRA accepts proposals that meet certain conditions:

• The proposal offers more than CRA would recover in a bankruptcy
• The debtor has filed all outstanding tax returns (this is critical — CRA will typically not support a proposal until returns are up to date)
• The proposal payments are realistic relative to the debtor's income
• For source deduction debts, the recovery percentage may need to be higher

Your Licensed Insolvency Trustee has experience structuring proposals that CRA is likely to accept. The key is ensuring all returns are filed and the offer is structured to meet CRA's internal guidelines.

Use our consumer proposal calculator to get an estimate of what your monthly payments might look like when CRA debt is included.

Filing Outstanding Tax Returns

If you have unfiled tax returns, you must file them before or shortly after filing your consumer proposal. This is non-negotiable for two reasons:

1. CRA needs to know what you owe. They cannot assess or vote on a proposal without knowing the full debt amount.
2. CRA will not support a proposal from a non-filer. Filing outstanding returns demonstrates good faith and cooperation.

Your LIT can work with you (or recommend a tax professional) to prepare and file outstanding returns. In many cases, filing returns results in additional refunds being applied against the debt, reducing the total amount included in the proposal.

Consumer Proposal vs. CRA Payment Arrangements

CRA offers its own payment arrangements for tax debts, so why choose a consumer proposal instead?

CRA payment arrangements:

• Require you to repay 100% of the debt plus ongoing interest
• Can be revoked if you miss a payment
• Do not protect you from additional collection action if your circumstances change
• Do not include other debts (credit cards, lines of credit)

Consumer proposals:

• Reduce the total amount you repay (typically 20% to 50%)
• Stop all interest from the filing date
• Provide legal protection from all creditors, not just CRA
• Include all unsecured debts in one payment
• Are legally binding once accepted — CRA cannot change the terms

For many people with significant CRA debt, a consumer proposal results in substantially lower total payments and eliminates the risk of CRA escalating collection actions.

Compare all your debt relief options to find the best approach for your situation, or take our debt relief quiz for a personalized recommendation.

FAQ

Do I need to file my tax returns before filing a consumer proposal? You should file all outstanding returns as soon as possible. While a proposal can technically be filed with returns outstanding, CRA is unlikely to vote in favour until all returns are submitted. Your LIT will help coordinate this.

Can CRA take my tax refund during a consumer proposal? For tax years prior to filing, CRA may set off (apply) any refund against amounts owed. For tax years during the proposal period, your refunds should be paid to you normally, though CRA may set off against any new debt arising during the proposal period.

What if my CRA debt is more than $250,000? If your total unsecured debts (including CRA) exceed $250,000 (excluding your mortgage), you cannot file a consumer proposal. Instead, a Division I proposal — which has no debt limit — may be an option. Your LIT will explain the differences.

Can CRA object to my discharge in bankruptcy? If you choose bankruptcy instead of a proposal, CRA can oppose your discharge if they believe you have not acted in good faith — for example, if you failed to file returns, misrepresented income, or incurred tax debt through negligence. A consumer proposal avoids this risk since there is no discharge hearing.

Sources

• Canada Revenue Agency — If You Owe Tax Debt
• Office of the Superintendent of Bankruptcy Canada (OSB)
• Bankruptcy and Insolvency Act (BIA), R.S.C., 1985, c. B-3
• Canadian Association of Insolvency and Restructuring Professionals (CAIRP)