Understanding How a Consumer Proposal Impacts Your CRA Tax Debt in Canada

Owing money to the Canada Revenue Agency (CRA) can feel overwhelming, especially when interest, penalties, and collection actions start to pile up. If you’re weighing options to manage tax debt alongside other unsecured bills, a consumer proposal may be a practical way to regain control. Below, you’ll find a clear, step-by-step explanation of how a consumer proposal interacts with CRA tax debt, what changes once you file, and how to avoid common pitfalls.

Understanding How a Consumer Proposal Works

A consumer proposal is a legally binding agreement under the Bankruptcy and Insolvency Act (BIA). Filed through a Licensed Insolvency Trustee (LIT), it lets you offer creditors—including the CRA—partial repayment of what you owe, typically over up to five years, in exchange for stopping collection actions and freezing interest on included debts.

Key features:

• Debt reduction: Pay a portion of your total unsecured debt (what you pay depends on your circumstances and creditor negotiations).
• Fixed, affordable payments: Usually monthly, spread over a set term.
• Legal protection: Once filed, a “stay of proceedings” pauses collection activity on eligible debts.

To better understand how legal protections work in practice, see this overview of the stay of proceedings in consumer proposals.

CRA Tax Debt: What Counts and What Changes in a Proposal

Most personal tax obligations to the CRA are unsecured and can be included in a consumer proposal. Common examples include:

• Personal income tax (T1) balances and related interest/penalties
• GST/HST owing by sole proprietors and some self-employed individuals
• Director’s liability (for example, certain corporate payroll or GST/HST debts assessed to you personally)

Important: If the CRA has already registered a tax lien against your property before you file, that portion becomes a secured claim. Secured claims are treated differently and may limit how much a proposal can reduce what you owe (more on liens below).

For authoritative background on CRA’s role and obligations, consult the Canada Revenue Agency and the Financial Consumer Agency of Canada (FCAC).

How a Consumer Proposal Affects CRA Collections

Once your LIT files your consumer proposal, a stay of proceedings immediately pauses most collection activity on the debts included in your proposal. For CRA tax debt, that typically means:

• Wage garnishments and bank account freezes related to pre-filing tax debt are halted (though funds already seized may not be returned).
• New legal actions to collect pre-filing amounts are paused while creditors review your offer.
• Collection calls and letters relating to included debts should stop.

CRA—as a major creditor—will review, vote on, and often negotiate proposal terms. Your LIT manages this process and communicates with CRA on your behalf.

Interest, Penalties, and Fees in a Consumer Proposal

A major advantage of a consumer proposal is that interest and penalties stop accruing on debts included in the filing from the effective date. This is significant for tax debt, where charges can snowball.

While the proposal is being considered and—if accepted—throughout the repayment period, you make fixed payments to your LIT, who distributes funds to creditors according to the accepted terms.

Eligibility Rules and When a Consumer Proposal Makes Sense

For a Division II consumer proposal (the most common for individuals), total unsecured debt must generally be no more than $250,000 (excluding a mortgage on your primary residence). For joint proposals (often spouses), this cap rises to $500,000.

A proposal can be a strong choice if:

• You have multiple unsecured debts, including significant tax arrears.
• You can afford a reasonable monthly payment but not full balances plus interest.
• You want to avoid bankruptcy while retaining assets.

To compare this option with bankruptcy, see our complete guide to bankruptcy vs. consumer proposal in Canada.

Step-by-Step: Filing a Proposal That Includes CRA Tax Debt

Here’s how the process usually unfolds:

1. Meet with an LIT: You’ll review your income, expenses, assets, and liabilities to decide if a proposal is the best fit.
2. File all outstanding returns: CRA generally requires your tax filings to be up to date before they’ll support a proposal. Your LIT will help you confirm what’s outstanding.
3. Craft your offer: Your LIT proposes an amount and timeline that’s better than creditors would receive in bankruptcy but affordable for you.
4. Immediate protection: When your proposal is filed, the stay of proceedings pauses collection on included debts.
5. Creditor voting: Creditors (including CRA) vote to accept or request changes. Most proposals are resolved within weeks.
6. Make payments and complete duties: You make the agreed payments, attend two financial counselling sessions, and stay current on new tax obligations.
7. Certificate of full performance: After your final payment, remaining balances on included debts are legally discharged.

What Happens to Tax Returns and Refunds

Tax returns and refunds can be confusing in a proposal. Here’s a practical way to think about it:

• Pre-filing refunds and credits: CRA can usually apply (set off) refunds for tax years prior to your filing against the old debt, even after you file.
• Post-filing returns: Returns for tax periods after you file are your responsibility. If you expect a refund for a post-filing year, it generally belongs to you—unless you also owe for that same post-filing period.
• Credits and benefits: Benefits like the Canada Child Benefit are separate, but overpayments that pre-date the filing may be included in the proposal as debt.

For more on how proposals interact with refunds, see our guide on the impact on tax refunds and your responsibilities.

When CRA Has Placed a Lien: What to Know

If CRA registers a lien on your home or other property before you file, that portion of the tax debt becomes secured and isn’t reduced by the proposal like an unsecured claim. Options may include:

• Negotiating within your proposal to pay the value of the secured portion over time
• Exploring refinancing or sale plans to address the lien
• Assessing whether bankruptcy or another solution is more appropriate

Each situation is unique, and your LIT will explain how a lien changes your strategy based on your assets and equity.

Living With Your Proposal: Staying Compliant With the CRA

Once your proposal is accepted, it’s critical to stay onside with the CRA going forward. That means:

• Filing returns on time for current and future years
• Making instalments if CRA requires them
• Not building new tax debt

CRA expects timely compliance once a proposal is in place. Falling behind on new taxes can jeopardize your fresh start and may trigger renewed collection efforts for post-filing balances.

Alternatives to Consumer Proposals for Tax Debt

If a proposal isn’t right for your situation, consider these alternatives:

• Payment arrangement with CRA: You can sometimes negotiate a short-term payment plan directly with CRA. Details and contact information are available through the CRA.
• Debt consolidation: If you qualify for a low-rate consolidation loan, you might pay off high-interest balances and simplify payments. Learn about the benefits and risks of debt consolidation in Canada.
• Bankruptcy: A last-resort option that can eliminate most unsecured debts (including many tax debts) more quickly but with different consequences for assets and credit. Compare outcomes in our bankruptcy vs. consumer proposal guide.

Not sure whether consolidation can include tax arrears? Explore what to know about consolidating CRA tax debt.

Real-World Example: How a Proposal Can Reduce CRA Debt

Consider Kim, a self-employed contractor who fell behind on income tax and GST/HST instalments during a slow year. Balances grew to $38,000 with interest and penalties. Kim also had $22,000 in credit card debt and a modest car loan.

Working with an LIT, Kim filed all outstanding returns, then proposed to repay $28,000 over 60 months (~$467/month). The LIT showed creditors that the recovery in bankruptcy would be lower due to limited non-exempt assets. CRA supported the offer, and the consumer proposal was accepted.

Results for Kim:

• Interest and penalties on included debts stopped
• CRA garnishment was lifted under the stay of proceedings
• Monthly payments were affordable, and Kim kept the car
• Kim filed returns on time going forward and avoided new tax debt

Your numbers will differ, but this example illustrates how a well-structured proposal can resolve tax arrears and other unsecured debts in one plan.

Common Mistakes to Avoid With CRA and Proposals

• Not filing past-due returns: CRA typically won’t support a proposal until your filings are current. Prioritise this step with your LIT.
• Underestimating instalments: If you’ll owe this year, consider making instalments during the proposal to avoid new balances at tax time.
• Ignoring a CRA lien: A registered lien changes the playbook; get tailored advice early.
• Missing proposal payments: Falling three payments behind can annul your proposal, reinstating full balances and collections.

Conclusion: Key Takeaways

A consumer proposal can be a powerful way to manage CRA tax debt and other unsecured balances, especially when interest and penalties are piling up. By stopping most collection actions, freezing interest on included debts, and consolidating payments into one affordable plan, proposals offer a practical path to stability. Success hinges on filing outstanding returns, staying compliant with new tax obligations, and choosing the right structure based on whether liens or special circumstances apply. For policy details and updates, refer to the Canada Revenue Agency and guidance from the Financial Consumer Agency of Canada. For broader context on household financial pressures and insolvency trends, explore resources from Statistics Canada.