Topic: Consumer Proposal

debt consolidation and credit score

Does consolidating debts hurt your credit rating?

Rustyshackleford14 asks on Reddit:

Hi Victor,

I have the following debts

Line of credit… $13,000 @ 8.99%; Credit card… 1,500 @ 9.99%; Car loan… about $16,000 remaining at 1.99% over 4 more years; OSAP… About $3,000 left, I think around 5% and around 3 years of payments remaining.

My buddy was in a similar situation, but I believe he was playing higher interest rates on his debts. He consolidated his debts for 8.99%

I have two questions…

I was once told consolidating your debts hurt your credit rating. Is this true?

Is the interest rate standard for consolidating? Or do they base it on the individual situation? The majority of my debt is below or around 8.99%, so if it was standard, I’d just end up paying more interest on my total debt, no?

Victor Fong, Licensed Insolvency Trustee in Toronto, Canada replies:

Hi Rusty,

To answer your questions:

It depends how you consolidate the debts. If you’re taking out a consolidation loan at a bank (at a lower interest rate than the debts you want to pay off) and you use the proceeds to pay off the higher interest rate debt, your credit rating will be unaffected. If you are consolidating your debts through a debt management plan with non-profit credit counselling agency, your credit will be affected. In Ontario, you will have what is called an R7 on your credit report (it means you’re making a consolidated debt payment); for reference, an R1 is the highest credit rating. If you’re consolidating your debt through a consumer proposal (which is a debt settlement under the Bankruptcy Act), you will have what is called an R9 on your credit report (bad debt, uncollectible) until your proposal has been paid in full.

If you’re consolidating by getting a lower interest rate loan to pay off the other debts, then yes, of course you’re paying interest. If you’re doing a Debt Management Plan with a credit counselling agency, the agency will usually try to get a reduction on the interest you’re paying. If you’re filing a consumer proposal, your creditors are legally prohibited from accruing any more interest on your debts. So in a CP, the amount settled would be based on outstanding balance at the date the proposal is filed.

income tax refund

Income Tax Refund in a Consumer Proposal – Right of Set Off

Here is a good question from a consumer proposal debtor regarding his income tax refund:

“In 2011 when I filed for a consumer proposal I owed CRA money and they were part of the proposal.

I had a $5,000 refund that resulted from my filing my 2011 income tax return.

CRA seized the refund and applied that to the balance that I owed them. Can they do this?

Also, will I receive my 2012 income tax refund, or will they keep that too?”

This is a situation that a Licensed Insolvency Trustee will come across quite frequently among income tax debtors who have filed consumer proposals.

Although income tax debt is included in a consumer proposal, the Canada Revenue Agency has what is called a ‘right of set-off’. This means that if a debtor owes money to CRA and they owe the debtor an income tax refund, they can keep her income tax refund and apply it towards her outstanding tax debt.

The CRA can only apply a right of set-off toward a debtor’s income tax refund relating to the year in which her consumer proposal was filed and any prior years for which she is owed a refund.

The CRA cannot apply a right of set-off against future income tax refunds relating to the tax years after the year in which the debtor’s consumer proposal was filed.

In the above example, because he filed a proposal in 2011, the CRA applied a right of set-off against the debtor’s 2011 income tax refund, but the CRA cannot apply a right of set-off against his 2012 income tax refund.



income tax collections

How the Canada Revenue Agency collects income taxes

Income tax collections. The phone call or letter you’ve been dreading from the Canada Revenue Agency has finally arrived. You’ve performed a Google search and probably stumbled upon this article. This post is an overview of how the Canada Revenue Agency collects tax debt.

The Canada Revenue Agency (“CRA”) has significant powers under the Income Tax Act (“ITA”) to collect personal income tax debt. This post examines the collection procedures most commonly used.

Charge over real property

Under Section 223 of the ITA, the CRA can register a lien over a debtor’s home (or any other real estate owned by the debtor). It does so through the following steps:

  • The Ministry of Revenue issues a certificate which certifies an amount owing by the tax debtor
  • This certificate is registered with the Federal Court and when so registered, it has the same effect as if the certificate were a judgment obtained against the debtor for the amount owing plus interest until the amount is paid
  • The certificate shall be deemed to be a judgment of the Court against the debtor for a debt due to Her Majesty in Right of Canada
  • Evidence of the certificate registered with the Court and a writ issued by the Court are filed with the land registry where the debtor’s property located. This creates a lien in favour of Her Majesty for the tax debt owed.

Once this lien is registered, it effectively functions as a charge on the property and can only be removed once the tax debt is paid in full. Not even a proceeding under the Bankruptcy and Insolvency Act (such as a bankruptcy or consumer proposal) can remove this lien, as bankruptcy is only effective if it is filed before the lien is created.


Under Section 224(1) of the ITA, the CRA can issue a “Requirement to Pay” to a debtor’s bank or employer (the “Garnishee”), requiring it to remit proceeds to the CRA in order to satisfy the tax debt. If the Garnishee fails to comply, it is personally liable to the CRA for the amount that should have been remitted.

Such a garnishment can be stopped by filing a proceeding under the Bankruptcy and Insolvency Act, such as a personal bankruptcy or a consumer proposal.

If you are being garnished by the Canada Revenue Agency for unpaid income taxes, please contact your local bankruptcy trustee who can discuss your situation with you.

This post should not be interpreted as legal advice or a legal opinion. Please consult your local Licensed Insolvency Trustee to review your own particular circumstances.

© Copyright, 2013.

income tax debt and personal bankruptcy

Income tax debt and personal bankruptcy

Income tax debt. Despite beliefs to the contrary, personal income tax debt is treated no differently than most other types of debt under Canadian bankruptcy law. However, this statement comes with a caveat, which we’ll examine later later in this post.

Here is a typical scenario that occurs across frequently:

  • The debtor is self-employed and for one reason or another, has not filed personal income tax returns for a number of years;
  • She eventually has her earnings garnished by the Canada Revenue Agency. She calls CRA to find out what’s going on, and is told that they performed an arbitrary assessment of the income taxes that she owes, since she never filed her tax returns.

Here are the steps you should take:

  • Get your income tax returns filed. Once CRA assesses your income tax returns as filed, you may actually owe a lot less income tax than what CRA initially assessed. If that’s the case, you may be able to pay off your income tax obligations on your own;
  • However, if the actual amount assessed is still unmanageable, you should contact a bankruptcy trustee to determine what your options are to deal with your income tax (and other) debts.

Two formal options under the Bankruptcy and Insolvency Act are to file for personal bankruptcy or alternatively, make a settlement with CRA by way of a consumer proposal.

In contemplating filing for personal bankruptcy, you should be mindful of the following:

  • New amendments to the Bankruptcy and Insolvency Act came into force on 18 September 2009. An individual who filed bankruptcy prior to that date would be eligible for an “automatic” discharge; that is, she would be discharged automatically after fulfilling certain financial and counselling obligations without having to go to court to obtain her discharge;
  • If you file for personal bankruptcy on or after 18 September 2009 and you have: (1) at least $200,000 in personal income tax debt; and (2) the tax debt comprises 75% or more of your total debt, then you will be required to attend a discharge hearing with the bankruptcy court. The court will review your bankruptcy file and you may be required to pay more money to your bankruptcy estate as a condition of your discharge;
  • For example, as a rule of thumb, the Toronto bankruptcy court requires a bankrupt to pay between 10-15 percent of the principal balance of her personal income tax debts as a condition of her discharge. If the circumstances that led to her bankruptcy are particularly egregious (e.g., this is her second bankruptcy and her first bankruptcy was also income tax driven), she may be required to pay an even higher amount.

If you are contemplating filing a proposal to CRA, you should be mindful of the following:

  • If your total debts (defined as all debts excluding your mortgage on a principal residence) are less than $250,000, you will be eligible to file a consumer proposal. This is a streamlined approach of getting your proposal approved and your proposal can be automatically approved by your creditors within 45 days after being filed by a trustee;
  • If your total debts (defined as all debts excluding your mortgage on a principal residence) are more than $250,000, you will be required to file a Division I proposal. This requires a formal meeting of creditors and an application to the bankruptcy court to get your proposal approved. If your proposal is not approved by either the creditors or the court, you are deemed to have filed for bankruptcy at the creditors meeting or at the motion application, as the case may be;
  • Put your best foot forward. That is, offer the very best settlement you can afford when dealing with the CRA. CRA is very sophisticated in dealing with tax debtors who’ve undertaken formal insolvency proceedings, so it is best to deal with them in a straightforward manner.

This post should not be interpreted as legal advice or a legal opinion. Please consult your local Canadian Licensed Insolvency Trustee to review your own particular circumstances.

© Copyright, 2013.