If you owe money to the CRA, one of the most common questions is whether you can include GST or HST debt in a consumer proposal or bankruptcy in Canada. In many cases, the answer is yes. However, the result depends on who owes the debt, how the debt arose, and whether you are operating your business as a sole proprietorship or a corporation.
In Canada, a consumer proposal is a formal, legally binding process administered by a Licensed Insolvency Trustee under the Bankruptcy and Insolvency Act (BIA), and only a Licensed Insolvency Trustee can file a consumer proposal or bankruptcy. A consumer proposal may allow a person to offer repayment of part of what is owed over a period of up to five years, including GST/HST arrears.
For people specifically worried about GST/HST arrears, the key issue is whether the debt is a personal unsecured debt from a sole proprietorship that can be compromised, or whether there are additional complications that may arise because the GST/HST is from an incorporated business. That distinction matters.
The short answer
Yes, GST/HST debt may be included in a consumer proposal or bankruptcy when it is part of your personal debt situation. This is often relevant for self-employed individuals and sole proprietors, because the business and the individual are legally the same person. In those cases, CRA debt, including GST/HST arrears, can form part of the debts addressed in the insolvency proceeding.
However, if the GST/HST debt belongs to an incorporated business, your personal consumer proposal does not eliminate the corporation’s liability for the GST/HST tax debt. This is because the incorporated business is a separate legal entity, and it continues to owe the GST/HST arrears.
Furthermore, if the owner continues to operate the incorporated business after the proposal is filed, then the directors may remain personally liable for the GST/HST arrears under the director liability provisions of the Excise Tax Act (ETA), especially for any new GST/HST debts that arise after the insolvency is filed.
If CRA has already assessed the director personally for the corporation’s GST/HST arrears under the ETA, then the GST/HST arrears are a personal debt and may be included in the proposal; however, it may be advisable to take appropriate steps to cease operating the corporation prior to filing the proposal to avoid incurring new director liability for GST/HST debts. These are complicated issues that should be discussed with a Licensed Insolvency Trustee.
What counts as GST debt?
When most people say “GST debt,” they usually mean GST/HST that should have been remitted to CRA but remains unpaid, along with any related interest and penalties. CRA describes GST/HST amounts collected by a business and not remitted as part of a deemed trust claim under the Excise Tax Act.
That is why GST/HST debt can feel different from a credit card or line of credit. It is a tax debt, and CRA has powerful collection tools at its disposal that include deemed trusts, Requirements to Pay, set-off, liens, garnishments, seizure of assets, and other enforcement tools. Even so, insolvency proceedings under the Bankruptcy and Insolvency Act may be helpful when the GST/HST debt has become part of your personal insolvency.
Can GST debt be included in a consumer proposal or bankruptcy?
In many cases, yes. GST/HST debt that forms part of your personal debt situation may be addressed through either a consumer proposal or a bankruptcy, depending on your circumstances. In both cases, the result will depend on whether the debt is a personal obligation, such as debt from a sole proprietorship or a personal CRA assessment, or whether the debt belongs to a corporation.
A consumer proposal can deal with unsecured debts owed to CRA, including income tax and GST/HST arrears. The CRA votes on the consumer proposal like other unsecured creditors. The proposal is binding if accepted by the required majority of creditors and approved as required under the Bankruptcy and Insolvency Act. Consumer proposals must be filed through a Licensed Insolvency Trustee and cannot extend beyond five years.
Bankruptcy may also address GST/HST debt where it forms part of the individual’s personal debt picture. For someone operating as a sole proprietorship, unpaid GST/HST may often be included because the individual and the business are the same legal entity. As a result, the debt may be addressed along with other unsecured debts, subject to a full review of the person’s circumstances.
If the GST/HST debt belongs to an incorporated business, a personal consumer proposal or bankruptcy does not eliminate the corporation’s liability. However, if CRA has assessed the individual personally, such as under the director liability provisions of the Excise Tax Act, that personal assessment may need to be reviewed as part of the individual’s insolvency options.
The CRA states that if a person files a proposal or files a bankruptcy, the GST/HST account is not automatically closed. That means the filing may address existing debt, but ongoing filing and remittance obligations may still continue for future business activity, depending on the situation.
Sole proprietor vs. corporation: the difference matters
This is where many people get confused.
If you are a sole proprietor
A sole proprietorship is not a separate legal person from its owner. They are the same legal entity. CRA’s own guidance explains GST/HST registration and obligations for sole proprietors; and in insolvency practice, a bankrupt sole proprietor may continue future business activities outside the proposal and bankruptcy estate, subject to the applicable rules.
Because of that, GST/HST debt from a sole proprietorship may often be included in your personal consumer proposal or bankruptcy, since the debt is generally your personal debt.
If the debt belongs to a corporation
A corporation is a separate legal entity. If the unpaid GST/HST is owed by an incorporated business, your personal consumer proposal or bankruptcy does not erase the corporation’s obligation on the debt. Furthermore, a bankrupt person is not permitted to be the director of a corporation during bankruptcy, and the directors of the corporation may remain personally liable for the corporation’s GST/HST debt as directors if the corporation continues to operate with other directors at the helm. That said, if CRA has assessed you personally under the director liability provisions of the Excise Tax Act, then that personal assessment may become part of your own debt picture. Section 323 of the Act provides that directors can be jointly and severally liable where a corporation fails to remit net tax as required.
What is director liability for GST/HST?
If you were a director of a corporation when it failed to remit net GST/HST, CRA may assess you personally. This is called a director liability assessment. It is a joint and several obligations that is separate from the corporation owing the GST/HST tax debt, itself.
This distinction is important because a person may say to themselves, “I owe GST,” when the real issue is one of three different things:
- unpaid GST/HST as a sole proprietor,
- unpaid GST/HST owed by a corporation, or
- a personal director liability assessment for unpaid GST/HST owed by a corpration.
Those situations may lead to very different insolvency options, and it is important that you speak to a Licensed Insolvency Trustee for proper information concerning those options.
Will CRA stop collection action?
A filed consumer proposal generally creates a stay of proceedings against unsecured creditors, and CRA is generally treated as an unsecured creditor in that process. A bankruptcy also trigger insolvency protections under the Bankruptcy and Insolvency Act. CRA’s own collections guidance notes that filing for bankruptcy or making a proposal under the Bankruptcy and Insolvency Act are actions that limit its collection efforts.
That does not mean every CRA collection issue disappears automatically in every case. Existing rights of set-off, secured positions, tax liens, Enhanced Requirements to Pay, timing issues, and the nature of the debt can all matter. This is one reason a tailored review with a Licensed Insolvency Trustee is so important where GST/HST debt is involved.
What about future GST/HST filings after you file?
This is another area people often overlook.
If you continue operating a business after filing, you may still have to file future GST/HST returns and keep current remittances up to date. CRA states that a proposal does not automatically close the GST/HST account, and CRA guidance for bankrupt sole proprietors also contemplates that a person may continue taxable business activity after bankruptcy under the applicable rules.
So, while a proposal or bankruptcy may help address past GST/HST debt, it does not give a person permission to ignore new GST/HST obligations going forward.
When a consumer proposal may be worth considering
A consumer proposal may be worth reviewing where:
You have GST/HST debt as a sole proprietor or under a director liability assessment.
If the tax debt is personal, a proposal may allow you to settle it through one structured monthly payment, depending on what your creditors accept and what is reasonable in your circumstances.
You want to avoid bankruptcy if possible
A proposal is not the same as bankruptcy. It is a negotiated insolvency process and may be suitable for some debtors who have enough income to offer a realistic settlement.
You need one process to deal with several debts at once
GST/HST debt often exists alongside income tax debt, credit cards, loans, or other arrears. A proposal may allow all qualifying unsecured debts to be dealt with in one proceeding.
Final thoughts
Yes, GST/HST debt may be included in a consumer proposal or bankruptcy in Canada, but the answer depends on the legal nature of the debt. If you are a sole proprietor, the debt may often be part of your personal insolvency. If the debt belongs to a corporation, your personal filing may not deal with it unless CRA has assessed you personally, such as through director liability assessment.
Because CRA debt can involve deemed trust rules, director assessments, and ongoing filing obligations, this is an area where generic advice may be misleading. The Licensed Insolvency Trustee at David Sklar & Associates can review your situation, explain your options, and determine whether a consumer proposal, bankruptcy, or another solution may be appropriate based on your circumstances. Only a Licensed Insolvency Trustee can administer a consumer proposal or bankruptcy in Canada.
Key Questions About GST/HST Debt and Insolvency in Canada
In many cases, yes. If the GST/HST debt is your personal debt, such as debt from a sole proprietorship or a personal CRA assessment assessment, it may be included in a consumer proposal filed through a Licensed Insolvency Trustee.
It may be, depending on the facts. The Excise Tax Act states that the GST/HST deemed trust rule does not apply at or after bankruptcy to amounts owing before bankruptcy, but each case still needs individual review.
Usually, no. A corporation is a separate legal entity and continues to owe the GST/HST debt. However, if CRA has assessed you personally as a director, that personal director liability assessment may need to be reviewed as part of your own insolvency options.
Often, yes. CRA states that a proposal does not automatically close a GST/HST account, so future compliance may still be required depending on whether you continue operating.
