Understand How Taxes Work In A Consumer Proposal

Personal income tax

Tax Refund In Ontario

One of the significant advantages of a consumer proposal is that, unlike a bankruptcy, it is possible that you get to keep your tax refunds. 

If you do not have any outstanding tax return filings and no previous tax debt, then CRA will continue to send you your tax refunds. It will be entirely up to you to use the money where you need it most and you may also use it to prepay your proposal. 

CRA does have the right, though, to take your tax refunds for the tax years prior to your consumer proposal and offset it against tax debt you owe for other tax years prior to your proposal filing. 

You remain eligible to receive your tax refund for the income earned during the year of the proposal after the proposal filing date. To avoid processing delays on the CRA end, it is recommended that for the year of the proposal filing you file two tax returns (Pre and Post).

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Filing of Personal Income Tax Returns In Ontario

It’s essential to file all of your outstanding income tax returns or have them ready to be filed before proceeding with a consumer proposal. CRA does not accept consumer proposals of individuals with unfiled income tax returns. 

It is advisable that for the year of the proposal you file two tax returns (called Pre and Post). One for the period from January 1 to the date of the proposal and the second from the date of your proposal to December 31. These returns will be due in the year following the year of the proposal and they should be paper-filed, not e-filed with CRA.

If at the time of filing the proposal you anticipate owing taxes for the period from January 1 to the date of your proposal, you may also need to prepare a draft of that tax return. You will have to provide a copy of that draft return to your proposal Administrator. You do not have to file it with CRA.

Whenever you are unsure as to what might be required in your specific case, you should always seek the advice of your Licensed Insolvency Trustee also known as your consumer proposal administrator.

The great news is that once your consumer proposal is accepted by the creditors and if your income or the value of your assets subsequently increases, you will continue to pay only what is required by your consumer proposal and not more. So from that angle, you should not be afraid to keep your tax returns up to date.

Income Tax Debt In Ontario

When you file a consumer proposal in Canada, taxes get treated as unsecured debt — that is, as long as you don’t have a lien issued against your property by the CRA prior to the filing of your consumer proposal.

It is important that you tell your Licensed Insolvency Trustee if you owe taxes so that proper advice could be given to you.

Income Tax After Filing a Consumer Proposal In Ontario

Good news! Your consumer proposal covered any taxes you owe up to the date you file the proposal. 

That said, any taxes due on your income earned after filing a consumer proposal cannot be included in the consumer proposal. These amounts are required to be paid in full and on time. You will also be required to continue to timely file all future tax returns as prescribed by the law. 

David Sklar & Associates Can Help

The licensed insolvency trustees at David Sklar & Associates are always ready to answer your questions and concerns about financial problems and guide you toward a practical solution. Call us at 1-844-962-9200.

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If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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