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Struggling with tax debt and wondering if a consumer proposal or bankruptcy will help? Under Canada’s Bankruptcy and Insolvency Act, a consumer proposal is a legally regulated repayment plan that helps you manage your debt while keeping control of your assets. If you have tax debts or income tax returns, you should know how these options work to protect your finances in the future.
This guide walks you through what happens to tax debts, refunds, and your filing obligations under both consumer proposals and bankruptcy, so you can choose the best debt relief for your situation.
Jump to:
- What happens to your tax debt under a consumer proposal?
- Will I keep my tax refund during a consumer proposal?
- What happens to tax debt during personal bankruptcy?
- What are your obligations during bankruptcy or a proposal?
- Comparing consumer proposals and bankruptcy
What happens to your tax debt under a consumer proposal?
Under a consumer proposal, tax debts are treated as unsecured debt and can be included alongside other unsecured balances like:
The Canada Revenue Agency (CRA) doesn’t receive any special priority when you file a consumer proposal, and is instead considered like any other unsecured creditor. They must vote on your repayment plan in the same way as banks or credit card companies, with no additional powers beyond what the Bankruptcy and Insolvency Act in Canada provides.
If the majority of creditors vote in favour, your payment proposal becomes legally binding on all parties. This can reduce your total tax liability and roll your tax debt into one structured debt repayment plan.
Read our guide – Can I keep my house and car if I go bankrupt?
Will I keep my tax refund during a consumer proposal?
For the most part, you’ll keep your tax refunds during a consumer proposal, but there are important rules to understand:
- Under the Bankruptcy and Insolvency Act, your tax refunds usually remain your assets if they are earned after your filing date. That means refunds from future tax years belong to you and aren’t automatically taken by the CRA.
- However, refunds or credits for the year you file may be treated differently. The CRA has the right to apply any pre-proposal tax refunds or credits towards outstanding tax debts included in your consumer proposal. Thus, the year of filing is pro-rated to the date of filing, and you will get a portion of what is owed to you, or you will owe a portion to the CRA, not the full amount.
One advantage of a consumer proposal over personal bankruptcy is that you continue to file one standard income tax return for the full year, rather than separate pre- and post-filing returns.
What happens to tax debt during personal bankruptcy?
When you file for personal bankruptcy in Canada, most of your tax debts owed to the Canada Revenue Agency are included as part of your unsecured debts. This covers:
- Income tax
- Penalties
- Interest charges
- Unpaid source deductions
- Capital gains tax liabilities
- HST/GST
Once bankruptcy is filed, all collection actions (including wage garnishments, bank account freezes, and legal claims) must stop immediately. This gives you immediate protection while your Licensed Insolvency Trustee begins the process.
What happens at the end of the bankruptcy?
At the end of your bankruptcy, these tax debts are usually discharged, so you are no longer personally responsible for paying them. However, there are key exceptions to be aware of:
- Large CRA tax debts: If your tax debts are above $200,000 and represent more than 75% of your total debts, a court hearing may be needed before discharge is approved.
- Unfiled or fraudulent tax returns: Bankruptcy doesn’t automatically remove tax obligations linked to fraud or returns that were never filed. The Trustee is obligated to file your taxes for the year of bankruptcy and any prior year that may yield a refund.
What are your tax obligations during bankruptcy or a proposal?
Regardless of which you choose, you need to stay on top of your tax obligations.
Your tax obligations during a consumer proposal
- File all income tax returns on time: The CRA expects every income tax return to be up to date before and during your proposal. A missed deadline can slow things down.
- Manage monthly payments: Be sure to make all monthly payments as agreed under your payment proposal.
- Stay current with future tax filings: Your Licensed Insolvency Trustee will guide you, but you’re responsible for submitting full-year income tax returns for each year after the proposal.
Your obligations during bankruptcy
- Split tax year filings: Bankruptcy requires two income tax returns: one for the pre-bankruptcy period and one for the post-bankruptcy period in the same year. The Trustee will file this return for you.
- Provide accurate financial information: The CRA and your Licensed Insolvency Trustee rely on clear, accurate data about your taxes and income to finalise your bankruptcy.
Your tax obligations in a snapshot
| Feature | Consumer proposal | Personal bankruptcy |
|---|---|---|
| Inclusion of tax debt | Yes—as unsecured debt, with negotiation possible | Yes—all past tax debts forgiven (with exceptions) |
| Tax refunds | You keep refunds earned after filing; CRA offsets pre-filing only | Trustee takes all refunds for pre- and year-of filing |
| Tax filings | You file one standard return per year | Trustee files split returns (pre- and post-bankruptcy) |
| Trustee involvement | Guides repayment planning, keeps filings current | Administers estate, collects assets, distributes to creditors |
| Effect on refunds/assets | You retain control—no surrender of assets | You lose refunds; may give up assets, home equity, savings |
Consumer proposal or bankruptcy: Which should you choose?
- If you want to keep tax refunds, protect your assets (e.g. home equity, savings plan) and prefer a structured repayment plan with less disruption to your life, a consumer proposal is the more tax-friendly choice.
- If your tax debts are overwhelming, even through a debt repayment plan, bankruptcy may offer a complete reset, though it comes with stricter controls, loss of tax refunds for the filing year, and a major impact on your credit rating.
Ready to find your way out of debt?
We know how overwhelming debt can get. At Harris & Partners, we’ve been helping Canadians for over 50 years, reducing debt by up to 80% and giving people the fresh start they deserve.
Our experienced Licensed Insolvency Trustees take the time to listen to your story, explain your options in plain English, and create a repayment plan that truly works for your financial situation and future goals. Whether you’re worried about tax debts or collection actions, we’re here to help you take that first step. It only takes a few minutes to get started. Get in touch or try our free debt repayment calculator to see how much you could save, and start moving towards a life free from debt.
