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.