Does the CRA keep your tax refund in the year that you file a consumer proposal?

Yes, the CRA has the right to keep your tax refund for the year that you file a consumer proposal and any previous years where you are owed a refund. Therefore, the CRA can keep this money and put it towards your tax debt.

Tax refunds in a consumer proposal and the right of set-off

A consumer proposal is an agreement between you and your creditors, where you repay your creditors a percentage of what you owe, with the remainder essentially written off.

You can keep your assets. Your unsecured debts, including any income tax debt, will be wiped out at the end of the proposal.

When you file a consumer proposal, a Stay of Proceedings begins, creditors such as the Canada Revenue Agency cannot take any further steps to recover the money owed.

Interest is frozen, collection calls and legal action stop, and wage garnishments are lifted.

It’s important to understand that the CRA is not an ordinary creditor; they have many powers, and if you owe money, they can be difficult to negotiate with. They have a range of powers, allowing them to garnish wages, seize assets and register a lien on a property.

Because of a creditor’s right of set-off, one common debt recovery tactic is to divert a tax refund towards the tax debt you owe.

This allows the CRA to keep any tax refunds for the year you filed your consumer proposal and any previous years where you are owed a refund.

So, if you owed tax debt on the day you filed your consumer proposal and have a tax refund due for any years before you filed your consumer proposal (or for the year in which you filed), the CRA can effectively keep this money and put it towards your tax debt.

For the years that follow, this right of set-off is not applied to future tax refunds, giving you some additional money to pay off your proposal faster or just help you while you are repaying your debt.

And here’s the good news: any outstanding tax debts you owe will be included up to the date of your consumer proposal.

After entering into a consumer proposal, you must continue to file your taxes as usual and pay any taxes due after filing your consumer proposal.

See also: What happens to my taxes in a consumer proposal?

Get advice: always talk to a Licensed Insolvency Trustee about the best way to resolve your outstanding tax debts.

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Conclusion

A creditor has a right of set-off, meaning that the CRA can withhold a tax refund and put it towards the tax debt you owe.

This applies to the year you filed your consumer proposal and any previous years where you are owed a refund.

Future tax refunds for the following years are exempt, meaning you can keep them. Plus, you can eliminate your tax debts at the end of the consumer proposal term.

Every year, a consumer proposal helps thousands of Canadians reduce their debts, protect their assets and take back control of their finances.

To take the next step, let us connect you with a local Licensed Insolvency Trustee about the best way to resolve your tax debts.

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