Are Consumer Proposal Payments Tax Deductible?
There are many different legal ways and methods through which people can save taxes. Some of the most popular measures for saving taxes include investing in municipal bonds, making long-term investments, starting a business, and making maximum contributions to retirement accounts. A consumer proposal is not a tax-deductible instrument that can help you save on taxes. However, it may provide some relief (including relief from tax debt) in certain conditions.
Know More About Consumer Proposals
Consumer proposals are administered by LIT (Licensed Insolvency Trustee) and are a legally binding and formal agreement. The LIT works with the individual/business (the debtor) to develop the proposal, which is essentially the offer to pay the creditors in percentage. The proposal may also be for extending the time duration that is available to a person and debtor for paying off the debts that he or she owes to the creditor. In some cases, the consumer proposals may be agreements involving a percentage repayment as well as a repayment time-duration extension.
The consumer proposals are usually initiated when a business or an individual is near to being bankrupt and does not have enough capacity to repay the debt to the creditors. It can also be a suitable alternative when a person is close to insolvency/bankruptcy. When you are choosing a consumer proposal for debt repayment, you will have to first reach out to the LIT, which is a professional regulated by the government.
These regulated professionals can provide consultation services to both individuals and parties when they face problems related to debt. The LIT will also draft your consumer proposal. The proposal will outline the way the business or individual is going to repay the debt to the creditors. Once the LIT drafts the proposal, it will be sent to the creditors, who may reject or approve it. Creditors get a maximum of 45 days to decide on the proposal. A consumer proposal can be used for a variety of unsecured debts, including credit card debt, lines of credit, collection accounts, and unsecured personal loans. A secure debt like a mortgage or car loan cannot be resolved based on a consumer proposal.
Are Consumer Proposals Tax Deductible?
An individual may not gain any tax deduction based on the filing of a consumer proposal. It is not associated with taxes in any way. However, most of your income details will be included in a consumer proposal and will have the same priority as the other debts. When a consumer proposal is filed, the proceedings stay. Therefore, the creditors cannot take a collection action after you file a consumer proposal. But taxes are not the same as, say, charitable contributions, which are tax-deductible.
A consumer proposal can offer you relief when you have an income tax debt while not possessing the ability to repay the money due to consumer debts. A debtor can use a consumer proposal to repay the money (including tax debt) at more reasonable/favourable terms by using the proposal. However, you must file your tax returns before you can file a consumer proposal. If it is not done, the regulatory standards do not permit you to get out of your taxes.
Acceptance & Refusal of Consumer Proposal
If your proposal is accepted, you will have to repay the debt in the form of periodic payments or lump sum amounts in the timeframes outlined by the proposal and agreement. The debtor will also have to fulfill the other conditions of the proposal. However, the debtors can retain their assets. They may have to undergo two sessions of financial counselling. The debtor may also make changes to the consumer proposal and submit it again if it is not accepted by the creditors initially. If nothing works out, bankruptcy has to be declared.
The debtor will be released from all the debt if he/she meets the repayment conditions of the consumer proposal entirely. The proposal will be annulled in cases when the debtor misses on 3 payments or when the payment schedule does not follow the proposal conditions of a consumer proposal.
Most of the consumer proposals are based on a lesser amount than the original credit. Many of the creditors may agree to the consumer proposals as they will be able to receive money on a more regular schedule. It is a better option for them when compared to receiving no money at all. However, the consumer proposal and the repayments are not tax-deductible. Taxes are levied on your income, and the two are not connected in any way. However, consumer proposals may provide you relief in cases when you are struggling with your tax debt.