Understanding Your Consumer Proposal and Tax Return in Canada: A 2025 Guide

Dealing with debt is stressful, and tax time can add another layer of uncertainty. If you’re considering or already in a consumer proposal, understanding how it interacts with your income tax return, refunds, and Canada Revenue Agency (CRA) collections is essential. This guide breaks down what changes, what stays the same, and how to stay compliant while making steady progress toward a fresh start. You’ll find practical examples, timelines, and tips that reflect current Canadian rules and best practices—so you can make decisions with confidence.

Understanding Your Consumer Proposal and Tax Return

At its core, a consumer proposal is a legally binding agreement under the Bankruptcy and Insolvency Act (BIA) that lets you repay a portion of your unsecured debt over a period of up to five years. It’s administered by a Licensed Insolvency Trustee (LIT) and, when accepted, stops most collections and interest, including for eligible tax debts.

Understanding your consumer proposal and tax return responsibilities begins with two facts:

• You must still file your tax returns every year—on time and accurately.
• A proposal changes how CRA can collect on past tax debt but does not remove your ongoing tax obligations.

For an overview of insolvency options and your rights as a borrower, see guidance from the Financial Consumer Agency of Canada and the Canada Revenue Agency (CRA).

What is a consumer proposal in Canada?

A consumer proposal is an alternative to bankruptcy that typically lets you:

• Reduce unsecured debts (credit cards, lines of credit, personal loans, and many CRA income tax balances).
• Make one fixed monthly payment based on what you can afford.
• Protect assets you might lose in bankruptcy (for example, home equity above provincial exemptions).

If you’re comparing options, our comprehensive primer on bankruptcy vs. consumer proposal in Canada (2025) explains pros, cons, costs, and timelines.

How a proposal affects CRA collections

When your LIT files a proposal, a legal protection called a “stay of proceedings” generally stops most collection actions—including wage garnishments and bank freezes—while creditors review the offer. This stay also applies to CRA for eligible tax debts. Learn how the stay works in detail in our guide to the stay of proceedings.

Once the proposal is accepted and deemed approved by the court:

• Interest and penalties on included CRA tax debts generally stop from the filing date.
• CRA is bound by the proposal terms, provided you remain in good standing (make payments and keep future taxes current).

Tax Filing Responsibilities During and After a Proposal

Filing a consumer proposal does not change your duty to file annual T1 returns, remit GST/HST if you’re registered, or make instalments if required. The difference lies in how past tax debts are treated under the proposal versus how new taxes must be handled.

Before filing the proposal

• Bring past returns up to date. LITs often ask you to file any outstanding returns so CRA can confirm the full amount of tax debt to include in your proposal.
• Collect your T-slips, prior Notices of Assessment, and any CRA statements. This helps your LIT assess your situation accurately.

The year you file

Unlike bankruptcy, a consumer proposal does not split the tax year into “pre” and “post” returns. You’ll file a regular T1 return for the whole year by the standard deadline. For most employees, that’s April 30 of the following year; self-employed individuals generally have until June 15 to file, though any balance owing is due April 30. Always verify current deadlines with the CRA.

During the proposal

• Keep current on all new tax obligations. File on time, pay on time, and make instalments if CRA requires them.
• Avoid new balances owing. Persistent new tax debt can strain your budget and may trigger CRA to take action once the proposal ends—or in severe cases, may jeopardize your arrangement.

After completion

• Continue filing as usual. Your tax filing obligations do not change.
• Use your freed-up cash flow to build an emergency fund, plan for instalments, and smooth seasonal income changes (especially if self-employed).

Handling Tax Debts, Refunds, and Credits with CRA

Here’s how key tax elements usually work in a consumer proposal.

What happens to existing tax debt

• Included tax debts are frozen at the amount on your filing date. Interest and penalties stop accruing from that point, and you repay according to the proposal terms.
• CRA is bound by the proposal after it’s approved, provided you remain compliant throughout.

If you’re looking for alternatives, including where a new loan might be more appropriate, learn about whether you can consolidate CRA tax debt and when consolidation may or may not help.

Tax refunds and set-off

CRA has a legal right of set-off. In practice:

• Refunds related to periods before your proposal filing may be applied to pre-proposal tax debts.
• After your proposal is accepted (and once it’s deemed approved), post-filing refunds are generally paid to you, provided you remain compliant. Administrative practices can vary, so confirm specifics with your LIT and CRA.

For deeper context on tax refunds and credits in proposals, see our explainer on the impact on tax refunds and responsibilities.

GST/HST credits, CCB, and benefits

In a consumer proposal, you usually keep your GST/HST credits and Canada Child Benefit (CCB). If you have arrears, CRA may apply certain credits to pre-proposal debt until the proposal is approved. Once approved, those ongoing benefits are generally paid to you as long as you remain compliant. Always verify your specific situation with the CRA.

Business or investment debts and forgiveness rules

Canada’s tax rules include “debt forgiveness” provisions that can reduce tax attributes (like loss carryforwards) and, in limited cases, cause income inclusions—most often relevant to business or investment debts. Many Canadians in consumer proposals deal with personal-use consumer debts, where these rules typically won’t create new taxable income, but every situation is different. A qualified tax professional can confirm how the rules apply to you.

Practical Examples and Timelines

Example 1: Salaried employee

Chloe files a proposal on July 15 with $9,500 in income tax debt from prior years.

• Collections stop while creditors vote. Interest on the $9,500 stops from the filing date.
• Her 2025 tax return (covering the full year) is filed by April 30, 2026. Any 2024 refund that was pending pre-filing might be applied to her old balance. Her 2025 refund, after court approval of the proposal, is generally paid to her (assuming full compliance).
• She makes monthly proposal payments and stays current on new taxes—no more late balances or penalties compounding the problem.

Example 2: Self-employed with GST/HST

Omar is a registered sole proprietor who owes personal income tax and GST/HST. He files a proposal in March.

• His proposal includes eligible income tax and GST/HST balances owing as of his filing date.
• He continues to file quarterly GST/HST returns on time and remits all new amounts. Future GST/HST is not covered by the proposal—he must remain current to avoid new collections later.
• If CRA had a pre-filing refund to issue, it could be applied to his old debt. Once his proposal is approved, his new refunds and credits are generally paid, assuming he’s fully compliant.

Common Pitfalls and How to Avoid Them

• Missing filing deadlines: A consumer proposal doesn’t pause your filing deadlines. File early and use CRA’s online services to track your status.
• Underpaying instalments: If you’re required to pay instalments, budget for them. Shortfalls can create new balances and interest.
• Assuming all debts are included: Only the debts listed and provable as of the filing date are frozen. New balances after filing are your responsibility.
• Ignoring set-off: Pre-filing refunds may be applied to pre-filing tax debts. Plan your cash flow accordingly.
• Not verifying benefit eligibility: Ensure your GST/HST credits and CCB are properly directed to you after approval.

Smart Steps to Stay Compliant

• Update your CRA My Account. Monitor Notices of Assessment, instalment reminders, and benefit statements from the CRA.
• Budget for tax. If you’re self-employed or have multiple income sources, set aside a percentage of each payment for taxes and consider a separate tax savings account.
• Automate savings and instalments. Automation reduces the risk of missing due dates.
• Keep accurate records. Receipts and ledgers make filing smoother and reduce the risk of reassessments.
• Ask your LIT and a tax pro. Coordinate between your LIT and accountant to avoid surprises.

When a Consumer Proposal Makes Sense for Tax Debt

A proposal can be a strong fit if:

• You owe a significant amount of unsecured debt, including past-due income tax.
• You can afford a predictable monthly payment but not the full amount you owe.
• You want to stop collections, interest, and penalties on included debts, protect key assets, and avoid bankruptcy.

If your only major liability is tax debt and you have steady income, also explore non-insolvency options. Our resource on tax debt help strategies covers payment arrangements, relief of penalties/interest, and more. If you’re weighing broader options, see our expert guide to consumer proposals in Canada.

Staying Informed with Reliable Sources

• The Canada Revenue Agency provides official information on filing, instalments, benefits, and collections.
• The Financial Consumer Agency of Canada explains consumer rights and debt relief options.
• Statistics Canada regularly publishes trends on consumer insolvencies and household finances, giving context to market conditions.

Key Takeaways

• You must continue filing taxes on time during a consumer proposal—your filing obligations do not change.
• CRA collections on included tax debts are generally stayed upon filing, and interest/penalties stop from that date once approved.
• Pre-filing refunds may be applied to old balances; post-approval refunds typically resume to you if you remain compliant.
• Plan ahead for instalments and future taxes to avoid new debt while your proposal is in place.

Successfully navigating “understanding your consumer” proposal and tax return responsibilities can restore predictability to your finances. With the right information, a realistic budget, and support from experienced professionals, you can move through tax season and your proposal with clarity and confidence.