CRA debt can feel especially stressful when interest, penalties, and collection action continue to build. In many cases, unsecured CRA debt can be included in either a consumer proposal or personal bankruptcy. The right option depends on the type of debt, your income, your assets, and your overall financial situation.
Types of CRA Debt That May Be Included
Many unsecured debts owed to the Canada Revenue Agency can be included in a consumer proposal or personal bankruptcy, for example:
- Personal income tax debt
- Interest and penalties added to unpaid tax balances
- Most GST or HST debt from a sole proprietorship
- Government benefit overpayments
- Other unsecured amounts owing to the CRA
In general, the debt must have existed before the consumer proposal or bankruptcy was filed. New tax debt that arises afterward is treated separately and remains your responsibility.
The way CRA debt is handled can also depend on whether you are self-employed or own an incorporated business.
CRA Debt That May Need Additional Review
Some CRA debts are more complex and may not be fully addressed through a consumer proposal or bankruptcy without a closer review.
This can include:
- CRA liens already registered against property
- Payroll source deductions
- Corporate GST or HST debt
- Amounts that may create personal liability for a company director
- Tax debt connected to fraud or misrepresentation
The timing and legal status of the debt can make a significant difference. A Licensed Insolvency Trustee can review how the CRA balance is classified and explain which amounts may be included.
What Can the CRA Do If You Do Not Pay Your Tax Debt?
Unpaid CRA debt should not be ignored. The Canada Revenue Agency has broad collection powers and may act without following the same process as a typical creditor.
Depending on the situation, the CRA may freeze funds in your bank account, garnish wages or self-employment income, apply tax refunds or government credits to the balance, register a lien against your property, seize certain assets, and continue adding interest and penalties.
These actions can make an already difficult situation harder to manage. Getting advice early may provide more options before the CRA takes further collection action.
Understanding CRA Collection Action After You File
Filing a consumer proposal or personal bankruptcy creates a stay of proceedings. This legal protection requires unsecured creditors, including the CRA, to stop collection action on debts included in the filing.
This can stop wage garnishments, bank account seizures, collection calls, and legal actions. Interest on the included debts also stops.
However, a stay of proceedings will not remove a lien the CRA registered before you filed. Secured CRA debt and other complex tax obligations should be reviewed with a Licensed Insolvency Trustee.
CRA Debt and Bankruptcy vs Consumer Proposal
A consumer proposal and personal bankruptcy can both address eligible CRA debt, but they work differently. The right option depends on your income, assets, total debt, and ability to make payments.
A consumer proposal allows you to offer creditors a structured repayment of part of what you owe, while bankruptcy may discharge eligible unsecured debt after you complete the required process. The impact on your assets, tax refunds, monthly payments, and the length of the process can also differ.
How a Consumer Proposal Handles CRA Debt
A consumer proposal allows you to offer your creditors, including the CRA, a repayment of part of what you owe through one fixed payment plan.
Once the proposal is filed, interest on the included debts stops and most collection action is paused. You can usually keep your assets, and the payment amount will not increase if your income goes up later.
Proposal payments can continue for up to five years, but you may pay the balance off sooner if your finances allow. You will also need to complete two financial counselling sessions.
The amount offered in the proposal is based on your total unsecured debt, income and expenses, assets, and what your creditors may receive if you filed for bankruptcy instead.
How Bankruptcy Handles CRA Debt
Personal bankruptcy may eliminate eligible unsecured CRA debt after you complete the required duties and receive your discharge.
Unlike a consumer proposal, bankruptcy can affect certain assets and may require ongoing income reporting. Your income can also influence how long the bankruptcy lasts and whether additional payments are required.
Certain tax refunds may be paid to the Licensed Insolvency Trustee, and you will need to complete two financial counselling sessions along with the other required steps in the bankruptcy process.
Bankruptcy may be considered when your debt is unmanageable and a consumer proposal payment is not realistic.
Consumer Proposal vs Bankruptcy Comparison
Both options can help address CRA debt, but the right choice depends on your income, assets, total debt, and ability to make payments. A consumer proposal may allow you to keep your assets and repay part of what you owe through fixed payments, while bankruptcy may be more appropriate when repayment is not realistic.
For a broader comparison of these options, read our guide to bankruptcy, consumer proposals, and debt consolidation in Canada.
What Happens to Your Tax Returns During Bankruptcy?
Bankruptcy changes how your tax returns and refunds are handled, especially in the year you file. Rather than repeating the full process here, you can read our guide to tax returns and bankruptcy for a clear explanation of pre-bankruptcy returns, post-bankruptcy returns, outstanding filings, and tax refunds.
CRA Debt and Insolvency FAQs
Does bankruptcy clear CRA debt in Canada?
Many unsecured CRA debts can be included in a personal bankruptcy. This may include personal income tax debt, interest and penalties, GST or HST debt, and certain government benefit overpayments. The final treatment depends on the type of debt and when it arose.
Can CRA debt be included in a consumer proposal?
Yes. CRA debt can be included in a consumer proposal along with other unsecured debts. The proposal allows you to offer creditors a repayment of part of what you owe through one fixed payment plan.
Do I need to file all my tax returns before making a consumer proposal?
Ideally yes. Your outstanding tax returns should be filed so the CRA can confirm the amount you owe and properly assess the proposal. If they are not, CRA may vote against the proposal until your filings are up to date, both personal income tax returns and GST returns if applicable.
Can CRA reject a consumer proposal?
Yes. Creditors have 45 days to review the proposal, and the CRA can vote on whether to accept it. The CRA may also request more information or make a counter-offer.
Will a consumer proposal remove a CRA lien?
A consumer proposal may not remove a lien the CRA registered against your property before you filed. A registered lien may be treated as secured debt and should be reviewed separately.
Can I keep my tax refund during a consumer proposal?
In most cases, you can keep your tax refund during a consumer proposal. However, there can be an exception if you owe income tax to the CRA.
If you have an income tax debt and receive a refund for the year you file your consumer proposal, the CRA may keep a prorated portion of that refund and apply it to your existing tax debt. The remaining portion of the refund is generally released to you.
This is different from bankruptcy, where certain tax refunds may be sent to the Licensed Insolvency Trustee.
Get Clear Advice About Your CRA Debt
CRA debt can become harder to manage as interest, penalties, and collection action continue. Getting advice early can help you understand whether a consumer proposal, bankruptcy, or another option may be right for your situation.
For more than 40 years, Campbell Saunders Ltd. has helped people across British Columbia find clear, practical solutions to debt. A Licensed Insolvency Trustee can review your CRA balance, income, assets, other debts, and tax filing history so you can make an informed decision.