Does CRA Keep your Refund in the Year that you do a Consumer Proposal?
CRA Tax Refunds and Consumer Proposals
A consumer proposal is a legal process that is designed to help people who are unable to pay all the debt they owe. When you file a consumer proposal, a Licensed Insolvency Trustee determines what a fair offer to your creditors will be. If the creditors that are owed the majority of the debt accept the proposal, then it becomes binding for all. A consumer proposal can be a way to pay only a portion of the debt you owe.
A consumer proposal can include tax debt owed to the Canada Revenue Agency (CRA). However, much like with all debt relief processes, there are potential downsides and many questions revolving around consumer proposals. One of the common questions is “does CRA keep your refund in the year that you do a consumer proposal?”
This is an important question as you do not want to end up losing your tax refund if you can at all avoid it. It’s also important since the answer to the question can seem relatively complicated.
What a Consumer Proposal Means for your Tax Refund
A consumer proposal is a legal process. One aspect of a consumer proposal that many find to be a big benefit is that you receive legal protection when you file. This means that, once you file a consumer proposal, your creditors are not able to take any legal action against you to collect the debt that is owed. If any legal actions are in place when the proposal is filed, these actions must stop. This is called a “Stay of Proceedings.”
For example, if you owe money to a creditor and that creditor has taken steps to garnish your wages, this garnishment must stop once you file a proposal. However, the CRA has specific powers that other creditors do not.
One CRA collection power is the right to issue a “set off” when you owe the agency money. This means that, for example, if you owe tax debt and do not pay, the CRA can take money that would otherwise be owed to you by the agency (or any other federal department or agency) and apply it towards your debt. An example would be HST/GST credits. If you owe tax debt, the CRA can take any HST/GST credits that you would otherwise be owed and use this money to reduce your outstanding tax debt.
The CRA can also issue a set off that allows it to apply your tax refund for one year against the tax debt that is owed from the previous year. For instance, consider a situation where you owe $500 on your 2017 taxes and do not pay. If you then file your 2018 taxes and are entitled to a $400 refund, the CRA can take this 2018 refund and apply it against the outstanding 2017 balance owing. This means you will not get your refund.
This process matters in the case of a consumer proposal, since the CRA can issue a set off on the day you file a consumer proposal. This means it can keep any tax credits or refunds that you would have received for any tax year up to and including the one in which you filed your proposal. For instance, if you filed a consumer proposal in 2018 and then filed your 2018 taxes in early 2019, the CRA can claim that, since the refund is applicable to the year you filed the proposal (2018), it has the right to apply this money toward your outstanding tax debt. This is the case even though you would have received this refund after you filed your proposal.
However, this is the only year in which the CRA can make this claim. In subsequent years, the CRA cannot use your tax refund to reduce a balance owing that was included in a consumer proposal. If you consider the example above, if you filed your 2019 taxes in early 2020 and are assessed as being entitled to a refund, you will receive this refund unless you owe new tax debt for the years after you filed the proposal.
It is also important to note that the CRA can reassess tax returns after they have been initially assessed. If a tax return that was filed before your consumer proposal is later reassessed, and if this reassessment states that you are due to receive a refund, this refund can be applied against your tax debt even if you have filed a consumer proposal. That is because the refund is attached to a tax return that was due prior to the consumer proposal.
It is important to realize that this answer to the question “does CRA keep your refund in the year that you do a consumer proposal?” is a generic one that is based on hypothetical situations. The situation can become quite complicated and the specifics of what will happen in your specific situation will depend on many factors.
Most trustees offer a free consultation where they will review your situation, provide you with details on the available options, and answer any questions that you may have.
Dealing with the CRA and Consumer Proposals
As mentioned, the Canada Revenue Agency has powers that other creditors do not. The agency can garnish wages, freeze bank accounts, or issue a set off against other government funds without taking a case to court. Other creditors do not have this power. That makes the CRA quite unique and, often, quite difficult to negotiate with.
Since the agency has such strong powers, it knows that it can use them to influence negotiations. For example, some other creditors may be willing to accept less than is owed to them if you contact them and let them know that you are having difficulty paying your debts. This is because going to court is a lengthy and costly process. Creditors may be willing to reduce the amount you owe if it saves them the time and money of going to court to garnish your wages or freeze your bank account. This is not true with the CRA.
The CRA can take these actions without going to court. This means that the agency is much more likely to take these steps. It also means that the CRA will not take less than is owed to it in a negotiation. The agency may accept monthly payments instead of a lump sum, and it may even reduce interest and penalty charges in some situations, but it won’t take less than is owed to it. The CRA expects to receive the full amount of taxes owing and knows that it can take action to collect if it does not receive this full amount.
However, a consumer proposal can be an option if you owe tax debt and are not able to pay it in full. That is because, in a consumer proposal, only those creditors that are owed the majority of the debt must accept for the proposal to be considered binding. This means that if you owe debt to other unsecured creditors in addition to the CRA, you might be able to have your proposal accepted even if the CRA votes against it.
There are several ways that this situation can play out. For example, if you owe $3000 in tax debt and $7000 in credit card debt, you have a total debt of $10,000. If the CRA votes against accepting the proposal, but any creditor or collection of creditors that is owed at least $5000 votes to accept, the proposal becomes binding despite the CRA voting against the proposal.
There may be situations where the CRA is owed the majority of the debt or where a majority vote cannot be reached without the CRA accepting the proposal. This means you’ll need to have the CRA accept the terms for it to become binding.
Getting the CRA to Accept a Consumer Proposal
As mentioned, the CRA does not want to accept less than is owed to it. However, the CRA may accept a proposal in certain situations. To increase the chances of the CRA to accept a consumer proposal, you will need to:
- Ensure that all your tax returns up to the date of the proposal have been filed
- File all tax returns that become due during the proposal period as they become due
- Pay all taxes owing during the proposal period. This is important since your proposal will include taxes owing only up until the date that it was filed. Future taxes must be paid as they become due.
- Accept that any refunds that arise from a CRA assessment or reassessment for tax years prior to the proposal being filed (including the current year) can be applied towards your debt.
- This is a situation that applies to the question “does CRA keep your refund in the year that you do a consumer proposal?”
It’s also important to note that consumer proposals can only include unsecured debts. These are debts that are not tied to an asset. In most cases, tax debt is considered unsecured debt. However, if the CRA has issued a lien against your property, it may no longer be considered unsecured debt. Speaking with a trustee can help you determine if a consumer proposal is the right option for you.
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