Consumer Proposal to the Canada Revenue Agency

Can you make a consumer proposal to the Canada Revenue Agency? Absolutely, so long as your total debts, excluding the mortgage on your principal residence, don’t exceed $250,000 (in which case you’d have to file what is called a Division I Proposal).

Under a consumer proposal, tax debts owed to the Canada Revenue Agency are treated like any other debts. And “tax debts” include debts for personal income taxes as well as business-related debts such as GST and payroll taxes.

However, when the CRA is the majority creditor, their vote for or against your proposal will decide its fate. As such, there are practices it engages in that you should be made aware of – and for ease of explanation, we’ll just focus on personal income taxes.

Filing your income taxes and provisional tax returns with the Canada Revenue Agency

You will need to bring your tax filings current before you file your consumer proposal. So if you’re filing your proposal on November 1st, 2019, you’ll need to have filed all your T1 returns up to the 2018 tax year.

A consumer proposal will deal with your tax debts up to the date of the proposal filing. Therefore, your Trustee will work with you to prepare what is called a “provisional” income tax return which will be sent to the CRA along with your proposal documents for their review. A provisional income tax return  covers the period starting from January 1st to the date of your proposal filing. So if you’re filing your consumer proposal on November 1st 2019, your Trustee will prepare a T1 return covering January 1st 2019 to October 31st 2019. Any income taxes owed on that provisional tax return will be a debt included in your consumer proposal.

When does a provisional tax return have to be filed?

A provisional tax return must be filed in the year of the proposal filing if you:

• • received employment (or self-employment) income from any source(s) which had little or no tax deductions at source
  • received income from pension income with only legislated deductions taken at source and had, in the 2 years prior to filing the proposal, a net tax above the provincial threshold* requiring installments to be paid
  • disposed of some or all of a registered retirement savings plan (or similar type) holdings during the year of the proposal
  • disposed of any assets resulting in a capital gain during the year of the proposal
  • had business assets seized by a third party in the year of the proposal
  • received payments from a lawsuit or settlement (i.e. for lost wages) that are taxable
  • had owed a tax liability in the 2 taxation years immediately prior to the year of the filing of the proposal.

A Trustee will assist you with the preparation of a provisional tax return.

Undertaking to keep post-proposal tax filings and payments current

If you’re self employed, the Canada Revenue Agency will require the following provisions in your proposal as a condition of them accepting it:

1. The debtor covenants and agrees to keep current all filings, remittances and installments, if any, to Canada Revenue Agency during the course of the Proposal. Should the debtor fall into arrears by:

(a) more than $5,000.00; or

(b) more than two (2) months

and should the Trustee be notified in writing of such arrears, the CRA may then request that the Trustee declare the Proposal to be in default, or alternatively, request that the Inspectors, if any, temporarily waive such default based on its investigation of the underlying circumstances.

2. Upon notice in writing to the Trustee by the Canada Revenue Agency of a default with respect to the filing, remittance and installment requirements during the period outlined in the preceding paragraph, the Debtor shall be given thirty (30) days from the date of the notice to rectify any such default. Should the default not be rectified within the thirty (30) day period, a request can be made to the Trustee to have the Proposal annulled.

This simply means that during your proposal, you’ll have to keep your post-proposal tax filings and tax payments in good standing. Otherwise, the CRA will notify the Trustee that you’ve been negligent in your post-proposal tax filings and payments, in which case the Trustee will have to declare that your proposal is in default and hence annulled.

Meeting of Creditors

If the Canada Revenue Agency won’t accept your consumer proposal as filed, they’ll remit to the Trustee what is called Voting Letter “against” your proposal. In that event, the Trustee will have to call a Meeting of Creditors so that a CRA representative can meet with you to discuss what led to your financial difficulties, your current financial status, and your future financial prospects. By discussing these matters with you, the CRA representative is on a fact-finding mission to determine if the proposal that you offered is the best you can do.

Once she’s gathered all the facts about your situation, she’ll negotiate with you (with the Trustee acting as the facilitator) on what would be a fair settlement given your circumstances. Once both sides agree on what the terms of your consumer proposal should be, she’ll make a recommendation to her Director at the CRA that it accept the amended proposal.

On the other hand, if both sides cannot agree, CRA’s Voting Letter “against” your proposal will stand, and your proposal won’t be approved. At that point, you may want to consider filing for personal bankruptcy as an alternative to dealing with your debts.

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