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Understanding Tax Debt & the Bankruptcy and Consumer Proposal Processes

Many people who have tax debt look for options to help them pay their debts more easily. The Canada Revenue Agency (CRA) charges compound daily interest on any outstanding tax debt, which can make your debt increase in size very quickly if you’re not able to pay it right away, so it’s in your best interest to pay as soon as possible.

Am I responsible for the Tax Debt?

In some cases, you may be able to have the interest on your tax debt reduced or waived, but you will still be responsible for the full amount of the debt.

While some creditors may be willing to accept less from a debtor rather than risk getting nothing, the CRA will never accept an agreement or a payment plan from a taxpayer that involves paying less than is owed.

Bankruptcy and Consumer Proposal

If you are having difficulty paying your tax debt (or any other debts), speaking with a Licensed Insolvency Trustee can help.

Trustees are individuals who are licensed by the federal Office of the Superintendent of bankruptcy to provide debtors with information and administer legal insolvency processes. Most trustees will offer an initial consultation at no charge.

In this consultation, the trustee will review your financial decision and give you information on the options that are available to you. It is then up to you to decide how you wish to proceed.

Two processes that could be options are consumer proposal and bankruptcy.

  • Consumer proposal
    • A consumer proposal is a situation where you make an offer to all of your unsecured creditors to pay less than the total amount you owe. An unsecured creditor is any creditor that is owed money that is not tied to an asset (such as a home or a vehicle). Unsecured creditors include credit card companies, financial institutions who provided lines of credit or personal loans, and the Canada Revenue Agency when it comes to tax debt. This means you can include your tax debt in a consumer proposal.
    • If you decide to proceed with a proposal, the trustee will prepare a fair offer based on your financial situation. Your creditors will then vote as to whether they wish to accept the offer.
    • If those creditors that are owed more than 50% of the debt vote to accept the proposal, then all are bound by the terms. This means you can potentially pay off your tax debt to the Canada Revenue Agency as a part of your proposal and pay less than the full amount owing.
  • Bankruptcy
    • Bankruptcy is also a legal process that can only be administered by a trustee. The bankruptcy process is designed to give debtors an opportunity to eliminate their debts and start their financial life fresh.
    • If you decide to file for bankruptcy, the trustee will complete the necessary paperwork and inform your creditors.
    • You may be required to make monthly payments to the trustee who will then distribute them to your creditors. Whether this is required and the amount of these payments will depend on several factors including your specific financial situation. The trustee will inform you if this is needed.
    • Depending on how much you own, some of your assets may be taken and sold to pay your creditors. However, it is a common misconception that you lose everything you own in bankruptcy. This is not true. Most people are able to keep the vast majority of their assets as each province has a list of exemptions that debtors may keep when they file for bankruptcy.
    • The bankruptcy process is not designed to punish a person and leave them with nothing. It is designed to eliminate debt (such as tax debt) and provide a fresh start. This means many assets are protected by law. The trustee you are working with will explain this situation and ensure that you are able to keep exempt assets.

An advantage to the bankruptcy and consumer proposal processes is that, once you have filed, the trustee is responsible for all communication with your creditors. Your creditors are not legally allowed to take any collection action or legal action against you to collect the debt.

What is the relief for the Tax Debt from CRA?

This includes the Canada Revenue Agency in situations of tax debt. This can be a big relief to many people as the CRA has very strong collection powers. It can garnish wages, freeze bank accounts, and seize assets and sell them if a taxpayer does not pay their tax debt. If you file a consumer proposal or bankruptcy, you are protected from these actions.

Speaking to a Licensed Insolvency Trustee can help you decide if either of these legal processes are the best way for you to deal with your tax debt.