If you have outstanding tax debts, you should immediately get in touch with the Canada Revenue Agency (CRA) to work out a payment plan and avoid steep penalties.

That said, the CRA is not that flexible when dealing with debtors. For instance, most penalties usually include added interest as you repay. Furthermore, the CRA may limit your repayment period to a maximum of one year.

After this period, they may take further action such as withholding child tax credits and HST, garnishing your wages, contacting your clients to garnish payments, or even seizing your bank account. If you are unable to agree with the CRA on a suitable tax debt repayment plan, you can still manage to pay less than the amount you owe by filing a consumer proposal.

Requirements of a consumer proposal tax debt settlement plan

Filing a consumer proposal is the only way the CRA will allow you to pay less tax that you owe. Consumer proposals are structured in such a way that the creditor receives a “deal.” Although income tax debt is dischargeable through bankruptcy, there are other options available. It’s in your best interest to work out a favourable settlement plan that is also acceptable to the CRA.

Before the CRA can accept your proposal, the following conditions must be met:

• All tax returns be filed and up to date
• All tax returns due when filing the proposal must be filed at the right time
• All taxes owing after filing the proposal must be paid in full when they become due – this is because the proposal only contains a settlement for taxes owed before the date of filing
• If it is found that a refund is due after re-assessment of your taxes for prior years, the refund be first applied to the CRA’s outstanding indebtedness

In some cases, the CRA may impose additional terms. Considering the complexity of filing a consumer proposal for tax debt settlement, the law requires that the issue be handled by a licensed insolvency trustee on your behalf.

Avoid future tax debt problems

To avoid recurring tax debt problems, it is important that you get your finances in order. Debt consolidation services can help you manage your debts better and achieve financial freedom.