Owing money to the CRA adds a layer of fear to an already stressful situation. The government feels like an opponent you cannot negotiate with. But the law says otherwise, and you deserve to know that.
What Is a Consumer Proposal?
A Consumer Proposal is a federally regulated legal agreement between you and your creditors. It is governed by the Bankruptcy and Insolvency Act (Canada). It allows you to settle unsecured debt for less than the full amount you owe and repay it over a period of up to 5 years.
It is not bankruptcy. You keep your assets. You keep your bank account. You make one fixed monthly payment. At the end, any remaining eligible debt is legally discharged.
You must have between $10,000 and $250,000 in unsecured debt to qualify. CRA debt counts toward that total. Our Consumer Proposal service covers the full picture of how this works and what you can expect.
Does a Consumer Proposal Cover CRA Tax Debt?
Yes. Most CRA debt qualifies as unsecured debt and can be included in a Consumer Proposal. This includes:
- Personal income tax owing (including prior years)
- Penalties and interest charged by the CRA
- HST and GST balances
- Government benefit overpayments (CERB, EI, and similar programs)
Payroll source deductions are more complex. If you operated a business and failed to remit employee deductions to the CRA, those amounts may be treated differently under the law. This is an area where the specifics of your situation matter. Speak with us before assuming what is or is not included.
Important: CRA requires that all outstanding tax returns are filed before they will vote in favour of a Consumer Proposal. If you have unfiled returns, getting those returns filed is a necessary first step.
Is CRA Legally Bound by the Proposal?
This is the question most people with CRA debt want answered, and the answer is yes.
Under the Bankruptcy and Insolvency Act, CRA participates in the creditor vote the same way any other unsecured creditor does. If the majority of creditors, measured by the dollar value of the debt they hold, vote in favour of the proposal, then all unsecured creditors are bound by the outcome, including the CRA.
CRA cannot opt out. CRA cannot continue pursuing you. CRA cannot garnish your wages or freeze your bank account once the proposal is accepted. The law applies to them the same way it applies to your credit card company or your bank.
CRA does vote strategically. They weigh what they are likely to recover through the proposal against what they might recover through other means. A well-structured proposal, one that creditors are likely to accept, matters. That is where legal representation makes a difference.
What Happens to CRA Collections When You File?
The moment the formal Consumer Proposal process begins, an automatic stay of proceedings takes effect. This is a legal freeze on collection activity. It applies immediately and covers:
- CRA wage garnishments
- CRA bank account freezes
- Collection calls and notices from the CRA
- Interest charges from the filing date forward
- Legal action from other unsecured creditors
If the CRA has already started garnishing your wages, that garnishment stops. If your account has been frozen, that freeze is lifted. The stay gives you breathing room while the proposal moves forward.
You can read more about how garnishments work and how they are stopped in our guide to wage garnishment in Canada.
Consumer Proposal vs CRA Payment Plan vs Doing Nothing
Before deciding on a path, it helps to compare your real options side by side.
| Factor | Consumer Proposal | CRA Payment Plan (Installment Agreement) | Doing Nothing |
|---|---|---|---|
| Debt reduction | Yes. You repay a fraction of what you owe. The rest is legally discharged. | No. You repay 100% plus ongoing interest. | No. Debt grows with interest and penalties. |
| Interest on the debt | Stops on the filing date. No new interest accrues. | Interest continues to accumulate throughout. | Interest and penalties keep growing. |
| Wage garnishment | Stopped immediately by the legal stay. | Not protected. CRA can still garnish if you miss a payment. | No protection. CRA can garnish without going to court. |
| Bank account freeze | Lifted by the legal stay. | Not protected. | No protection. |
| Credit impact | R7 notation. Stays 3 years after completion. | No formal credit impact from the plan itself. | Collections and judgments damage credit severely. |
| Legal protection | Yes. Federal law governs the process. | No. CRA can cancel the arrangement. | None. |
| Timeline | Up to 5 years of payments, then debt is discharged. | Varies. CRA negotiates terms case by case. | Debt is indefinite. CRA has 10 years to collect in most cases. |
Can CRA Reject a Consumer Proposal?
CRA can vote against a proposal. But a “no” vote from CRA does not automatically kill the proposal. What matters is the overall vote count.
For a Consumer Proposal to pass, a majority of the dollar value of all voting creditors must approve it. If CRA holds less than 50% of your total unsecured debt, they cannot block the proposal on their own. Other creditors, such as credit card companies or banks, also vote. Their votes count too.
If CRA holds more than 50% of your unsecured debt, their vote carries more weight. In those cases, structuring the proposal in a way that addresses CRA’s expectations becomes more important. This is another reason legal guidance matters in CRA-heavy cases.
What a Consumer Proposal Does and Does Not Cover
Typically Included
- Personal income tax debt
- CRA penalties and interest
- HST and GST owing
- CERB or EI overpayments
- Credit card balances
- Personal loans (unsecured)
- Lines of credit (unsecured)
- Payday loans
Not Included
- Mortgage (secured debt)
- Car loan (secured debt)
- Student loans (if less than 7 years since leaving school)
- Child support or alimony
- Court-ordered fines or restitution
- Fraud-related debts
How the Process Works for You
- Free legal consultation. We review your full debt picture, including what you owe the CRA, and explain which options fit your situation.
- Proposal terms are prepared. A repayment plan is structured based on your income, assets, and what creditors are likely to accept. Getting this right matters, especially when CRA is a major creditor.
- The formal process begins and the stay takes effect. The Consumer Proposal is filed by a Licensed Insolvency Trustee. The legal stay kicks in immediately, stopping CRA collection activity.
- Creditors vote, including the CRA. Creditors have 45 days to vote. We represent your interests throughout. If approved by the majority, all creditors, including CRA, are legally bound.
- You make your monthly payments. One fixed payment per month for up to 5 years. No interest. No surprises.
- Remaining debt is discharged. Once your final payment is made, the remaining eligible debt is legally erased. Your obligation to CRA and other creditors ends.
Why Work with a Law Firm, Not Just a Trustee?
A Licensed Insolvency Trustee (LIT) is the professional who administers the Consumer Proposal under the Bankruptcy and Insolvency Act. But here is the part most people do not know: a LIT is legally required to act impartially. They do not work exclusively for you. They have obligations to the process and to creditors too.
We are a law firm. Our legal duty runs entirely to you. We advise you on your rights, we help structure a proposal that protects your interests, and we represent you if creditors push back. That is a different kind of representation than what a trustee alone can provide.
When CRA is one of your creditors, having someone in your corner who is solely focused on your outcome can matter. We only make money when we save you money, and that alignment is built into how we work.
Frequently Asked Questions
Can I include CRA debt in a Consumer Proposal?
Yes. Most CRA debt, including personal income tax, HST, GST, and benefit overpayments, qualifies as unsecured debt under the Bankruptcy and Insolvency Act. It can be included in a Consumer Proposal along with your other unsecured debts.
Is the CRA legally bound by a Consumer Proposal if it passes?
Yes. If a majority of creditors, by dollar value, vote to accept the proposal, then all unsecured creditors, including CRA, are legally bound by the outcome. CRA cannot opt out or continue collection after a successful vote.
Does a Consumer Proposal stop CRA wage garnishment?
Yes. An automatic stay of proceedings takes effect when the formal proposal process begins. This immediately stops any active CRA wage garnishment and prevents new garnishments from being issued during the process.
Can CRA freeze my bank account if I’m in a Consumer Proposal?
Once the legal stay is in place, CRA cannot freeze your bank account. Any existing freeze is lifted. The stay is a legal protection that applies to all unsecured creditors, including the government.
What if CRA votes no on my Consumer Proposal?
A no vote from CRA does not automatically kill the proposal. What matters is the overall creditor vote. If CRA holds less than 50% of your total unsecured debt, other creditors can outvote them. If CRA holds the majority of your debt, their vote carries more weight, which is why structuring the proposal carefully in those cases matters.
Do I need to have all my tax returns filed before filing a Consumer Proposal?
Yes. CRA requires that all outstanding tax returns are filed before they will vote in favour of a Consumer Proposal. If you have unfiled returns for past years, those need to be completed as part of preparing for the process.
Will a Consumer Proposal stop CRA interest from growing?
Yes. Interest stops accruing on your CRA debt from the filing date forward. This is one of the most significant financial advantages of a Consumer Proposal over a CRA installment payment plan, where interest continues to accumulate throughout.
Can I keep my tax refund while in a Consumer Proposal?
For tax years after the filing date, tax refunds generally belong to you. Refunds from the year of filing may be treated differently. This is one of the nuances worth discussing in a consultation, as the details depend on your specific filing timeline.
How does a Consumer Proposal affect my credit score?
A Consumer Proposal is recorded on your credit report as an R7 rating. This notation stays on file for 3 years after you complete the proposal. While it does affect your credit, completing a proposal is generally viewed more favourably than bankruptcy and gives you a foundation to start rebuilding.
What is the difference between a Consumer Proposal and a CRA payment plan?
A CRA payment plan (installment agreement) requires you to repay 100% of what you owe, plus ongoing interest, with no legal protection against garnishment if you miss a payment. A Consumer Proposal lets you repay a portion of the total debt with no further interest, and it includes full legal protection throughout. The two are fundamentally different in cost, protection, and outcome.
What happens to payroll source deductions in a Consumer Proposal?
Unremitted payroll source deductions (amounts you were supposed to withhold from employees and remit to CRA) are treated differently from personal income tax debt. The rules around these amounts are complex and depend on the specific circumstances. This is an area where you should speak with a lawyer before making any assumptions about what is or is not included.
Ready to Find Out Where You Stand with CRA?
You do not have to keep living under the pressure of CRA debt. A free consultation costs you nothing, and you will leave with a clear picture of your legal options.
