How a Consumer Proposal Affects Your Tax Return in Canada: What to Expect and How to Prepare

When debt feels overwhelming, a consumer proposal can be a smart way to regain control without filing for bankruptcy. But many Canadians ask a crucial question before they proceed: how does a consumer proposal affect your tax return? Understanding the interaction between the Canada Revenue Agency (CRA), your annual filings, refunds, and credits can help you avoid surprises and plan with confidence.

This guide explains what changes—and what doesn’t—once you enter a consumer proposal, and offers practical tips to keep your taxes on track throughout the process.

What is a Consumer Proposal?

A consumer proposal is a legally binding agreement, filed through a Licensed Insolvency Trustee (LIT), that lets you repay a portion of your unsecured debt over a set period (up to five years) while protecting you from collection action. It’s an alternative to bankruptcy that allows you to retain assets, pause collection calls, and consolidate payments into a single, affordable monthly amount.

To dig deeper into proposal mechanics, including how refunds may be treated, see our detailed overview of consumer proposals, tax refunds, and responsibilities.

How a Consumer Proposal Affects Tax Debt in Canada

Tax debt is a common concern. Here’s what to know about including it in your proposal and how collection activity changes once it’s filed.

Are tax debts included in a consumer proposal?

Yes—personal income tax, GST/HST assessed personally, and many other CRA balances are unsecured debts and can be part of your consumer proposal. When CRA is listed as a creditor, it becomes bound by the proposal’s terms if the proposal is accepted. That means you’ll repay an agreed portion of your tax debt alongside your other unsecured debts.

For more on integrating CRA balances, read our guide to consumer proposals and CRA tax debt.

Interest, penalties, and collections stop

Once your proposal is filed, a legal “stay of proceedings” takes effect. This stay stops most collection actions, including wage garnishments, bank freezes, and new interest on unsecured debts included in the proposal. CRA is subject to this stay, too, after the proposal is accepted, meaning aggressive collection measures on the included tax debt generally pause.

Learn how protections work in practice in our explainer on the stay of proceedings.

Filing Tax Returns While in a Consumer Proposal

Your filing obligations don’t stop just because you’re in a proposal. Staying compliant is critical to keeping your agreement in good standing.

Deadlines and outstanding returns

You must continue filing your taxes on time every year. If you have unfiled returns before you start your proposal, your LIT will generally ask you to file them promptly so your total CRA balance can be accurately included. Missing future filing deadlines can undermine your proposal and may lead CRA to reassess or hold back refunds until returns are up to date.

Self-employed and instalments

If you’re self-employed or required to make tax instalments, that obligation continues. A consumer proposal doesn’t cover new tax debt you incur after your filing date. Set reminders to make instalments and plan for April balances so you don’t create fresh tax arrears while your proposal is active.

Will You Lose Your Tax Refund in a Consumer Proposal?

Tax refunds are one of the biggest points of confusion. Here’s the most important takeaway: in many cases, Canadians in a consumer proposal keep their tax refunds. That’s a key difference from bankruptcy, where certain refunds are automatically assigned to the estate.

Typical outcome: what usually happens

After your consumer proposal is filed and accepted, refunds issued for tax years after your filing date are generally paid to you. The proposal does not automatically assign your refund to your LIT or creditors. Many Canadians use refunds to build emergency savings, pay down secured debts, or catch up on essentials.

For a practical walkthrough, see Understanding your consumer proposal and tax return.

When CRA may offset a refund

There are exceptions. CRA has a statutory right of set-off. In limited circumstances, it can apply a refund against amounts you owe. This is more likely if:

• You have unfiled prior-year returns that show balances due.
• You incur new tax debt after filing your proposal (post-filing arrears are not included in the proposal).
• There are compliance issues, reassessments, or certain types of assessed amounts not covered by the proposal.

In practice, once your proposal is accepted and you remain compliant, set-off against pre-proposal balances included in the proposal is uncommon. Your LIT can clarify how CRA has handled refunds in situations like yours.

For official program and filing guidance, refer to Canada.ca (Government of Canada). While CRA processes and internal policies can evolve, the core framework above holds for most consumers.

GST/HST, CCB and Other Credits During a Proposal

Federal credits such as the GST/HST credit, Canada Child Benefit (CCB), and the Canada Workers Benefit (CWB) are designed to support household income. These benefits typically continue while you’re in a proposal as long as you stay compliant with tax filings and eligibility requirements.

That said, as with refunds, CRA can sometimes apply amounts against post-filing tax debt if you fall behind again. To confirm eligibility rules for income-tested benefits and related programs, review resources from Employment and Social Development Canada.

Consumer Proposal vs Bankruptcy: What Happens to Tax Refunds?

It’s helpful to compare treatment of taxes and refunds in a proposal versus bankruptcy:

• Consumer proposal: You generally keep future tax refunds. CRA collection on included tax debts stops after acceptance, and you make agreed payments through your LIT.
• Bankruptcy: Certain refunds (for the bankruptcy year and sometimes prior years) are typically assigned to the trustee for the benefit of creditors. Filing compliance remains essential.

Explore the broader differences in our complete 2025 guide to bankruptcy vs. consumer proposal.

Common Scenarios and Examples

These simple case studies illustrate how refunds and tax balances often work in real life.

• Case 1: Employee with past tax debt (refund expected)
  Alex owed CRA $7,500 from older returns and filed a consumer proposal in October 2025. The proposal was accepted in December. Alex filed the 2025 return in April 2026 and received a refund. Because the older balances were included in the accepted proposal and Alex stayed compliant, CRA did not set off the new refund. Alex put the refund into an emergency fund.
• Case 2: Self-employed with instalments (balance due)
  Sam is self-employed and filed a consumer proposal in June 2025, including $12,000 of prior tax debt. In April 2026, Sam filed the 2025 return showing a $2,200 balance due (post-filing income). Because this was new tax debt, it was not covered by the proposal, and Sam had to pay it directly to CRA. Sam set up a payment arrangement to stay compliant and keep the proposal in good standing.
• Case 3: Unfiled prior returns
  Priya filed a proposal in early 2025 with two unfiled returns (2023 and 2024). The LIT required Priya to file outstanding returns so CRA could assess and include accurate balances. Priya’s 2025 refund was held temporarily until CRA completed assessments. After acceptance and compliance, future refunds were paid to Priya.

Practical Tax Tips While in a Consumer Proposal

• File on time, every time. Late filings can cause refund holds, reassessments, or compliance flags. Put reminders in your calendar.
• Update your tax withholdings. If you regularly owe at filing, adjust payroll withholdings or set aside funds monthly. Self-employed Canadians should plan instalments carefully.
• Expect no interest on included balances. Interest and penalties on the tax debt included in your proposal stop after filing, once accepted. That helps your payments go further toward principal.
• Avoid new tax debt. Post-filing tax balances are not covered by the proposal and must be paid separately. Falling behind again can jeopardize your plan.
• Track benefits and credits. Keep your address and direct deposit info current with CRA to avoid delays with the GST/HST credit, CCB, and other benefits.
• Document everything. Keep notices of assessment, instalment statements, and correspondence with CRA. Share key updates with your LIT.

For broader context on why more Canadians are turning to structured relief, see household debt trends from Statistics Canada.

How a Consumer Proposal Impacts Your Financial Future

While your proposal is active, you’ll make fixed monthly payments, learn budgeting habits, and clear included debts—often including CRA balances. Many Canadians report reduced stress and improved financial control within months of filing.Because a consumer proposal typically lets you keep future refunds, you can use them strategically: build a small emergency fund, catch up on utility or insurance premiums, or set aside funds for upcoming tax instalments if you’re self-employed. Those choices accelerate your recovery.

Resources and Where to Get Help

Taxes inside a consumer proposal are manageable with the right information and support. These resources can help:

• Consumer proposals, tax refunds, and responsibilities – practical overview with tax-specific FAQs.
• Consumer proposal and your tax return – year-by-year expectations and tips to stay compliant.
• Consumer proposal and CRA tax debt – how CRA balances are treated before and after filing.
• Stay of proceedings guide – your legal protections from collections, including CRA.
• Canada.ca (Government of Canada) – official information on filing returns, benefits, and CRA contact options.
• Statistics Canada – data on household finances and trends affecting debt and savings.
• Employment and Social Development Canada – benefits and program details that may affect your household budget.

Conclusion

In most cases, a consumer proposal simplifies tax-related stress: CRA collection on included balances stops after acceptance, you keep future refunds, and you regain predictability with a single monthly payment. The keys to success are timely filing, careful planning to avoid new tax debt, and staying in close touch with your LIT about any CRA correspondence. With good habits and the right guidance, your tax return can support—not derail—your path to financial stability.