CRA Tax Debt Relief Options Canada: 5 Ways to Reduce or Eliminate Debt (2026)

If you owe CRA tax debt you cannot pay, you have five legal options: apply for Taxpayer Relief to cancel penalties and interest (not principal), negotiate a payment plan up to five years with interest continuing at three percent, file a consumer proposal to reduce debt by 60 to 80 percent with 97 percent acceptance, file bankruptcy to discharge 100 percent of tax debt (with Section 172.1 rules if debt exceeds $200,000), or attempt direct settlement for 20 to 50 percent reduction (30 to 40 percent approval rate). The Canada Revenue Agency has extraordinary federal collection powers that regular creditors do not possess, including wage garnishment up to 50 percent and bank account freezes without court orders. Most Canadians facing CRA collection actions choose consumer proposals because they eliminate the majority of debt while stopping wage garnishment immediately and keeping all assets including homes and vehicles.

The 2026 financial crisis has increased CRA collection activity, making timely action critical. Understanding each option’s debt reduction, timeline, cost, and legal protection helps you choose the fastest path to eliminate CRA debt and stop collection actions. Compare consumer proposals and other options below.

What Are Your 5 CRA Debt Relief Options?

The five CRA debt relief options vary significantly in debt reduction, approval rates, legal protection, and timelines. Taxpayer Relief cancels penalties and interest only with 40 to 60 percent approval after nine months of processing. Payment plans spread the full debt over one to five years with interest continuing at three percent.

Consumer proposals reduce debt by 60 to 80 percent with 97 percent creditor acceptance and immediate legal protection stopping garnishment. Bankruptcy discharges 100 percent of CRA debt in nine to 21 months but has stricter rules for high-tax debtors. Direct settlement is rare with 30 to 40 percent approval and requires lump-sum payment.

Only consumer proposals and bankruptcy provide a stay of proceedings under the Bankruptcy and Insolvency Act. This legal protection stops wage garnishment, bank freezes, and collection calls the day you file.

Does Taxpayer Relief Cancel CRA Tax Debt?

Taxpayer Relief cancels penalties and interest only, never the principal tax debt you owe. CRA approves 40 to 60 percent of applications when you document genuine hardship circumstances including job loss, serious illness, natural disaster, or extraordinary financial hardship beyond your control. You must file Form RC4288 with supporting documentation proving the hardship directly caused your inability to pay on time.

Processing takes nine months for standard applications and up to 48 weeks for complex cases involving international elements or multiple tax years. Even after approval, you remain responsible for paying 100 percent of the principal tax amount. If penalties and interest represent only 10 to 20 percent of your total debt, Taxpayer Relief provides minimal financial benefit.

Most Canadians with substantial CRA debt find consumer proposals more effective because they eliminate 60 to 80 percent of the principal debt itself, not just penalties.

How Do CRA Payment Plans Work?

CRA accepts payment arrangements up to five years based on your documented income and expenses. Call CRA Collections at 1-888-863-8657 to request a payment plan. You must provide details of your financial situation including monthly income, necessary living expenses, and other debt obligations.

Interest continues accruing at the prescribed rate of three percent annually for the second quarter of 2026. There is no debt reduction; you pay 100 percent of the principal plus accumulated interest over the payment term. CRA may pause active collection actions like wage garnishment during compliant payment arrangements, but this pause is not guaranteed and garnishment can resume immediately if you miss payments.

Payment plans work best for Canadians with small CRA debts under $10,000 who have sufficient income to afford full repayment. Larger debts or situations involving other creditors often require consumer proposals that reduce total debt and provide legal protection.

Can a Consumer Proposal Eliminate CRA Tax Debt?

Consumer proposals reduce CRA tax debt by 60 to 80 percent on average with 97 to 99 percent creditor acceptance rates. You file through a Licensed Insolvency Trustee who negotiates with all unsecured creditors including CRA to accept partial repayment over three to five years. CRA is treated as an unsecured creditor and legally bound by the proposal if creditors representing 50 percent or more of your total unsecured debt by dollar value accept the offer.

Filing triggers an immediate stay of proceedings stopping CRA garnishment, bank freezes, and collection calls the same day. Your employer receives legal notice within 24 to 48 hours and your next paycheque is restored to full amount. The stay remains in effect throughout your proposal term as long as you make monthly payments.

Consumer proposals include all CRA debt types: income tax arrears, GST and HST balances, penalties and interest, CPP and EI contributions, and CERB overpayments. A $50,000 CRA debt typically becomes $10,000 to $20,000 paid over four years at $208 to $417 per month. Licensed Insolvency Trustee fees are paid from your monthly payments under federal tariff—there are no upfront costs. See the complete breakdown of consumer proposal costs in Canada for fee structures and payment examples.

Calculate your potential consumer proposal payment using the CRA debt calculator to compare costs against payment plans or bankruptcy.

Does Bankruptcy Discharge CRA Tax Debt?

Bankruptcy discharges 100 percent of CRA debt including income tax arrears, GST and HST balances, penalties and interest, CPP and EI contributions, and CERB overpayments. First-time bankruptcy discharges in nine months with no surplus income or 21 months with surplus income. Filing creates an immediate stay of proceedings stopping CRA garnishment and collection actions within 24 to 48 hours.

Section 172.1 of the Bankruptcy and Insolvency Act creates special rules for high-tax debtors. If you owe $200,000 or more in income tax (including penalties and interest but excluding director liability) representing 75 percent or more of your total unsecured debt, judges may impose conditional discharge requiring you to pay 25 percent of the tax debt to CRA. The 21-month minimum discharge period applies regardless of surplus income status.

Bankruptcy works best for Canadians with no assets, minimal income, or debts exceeding $250,000 that disqualify them from consumer proposals. Read the complete guide on filing bankruptcy for CRA tax debt for Section 172.1 case examples.

Can You Settle CRA Tax Debt for Less?

Direct settlement with CRA for 20 to 50 percent of debt is possible but rare. CRA approves only 30 to 40 percent of settlement offers and requires extensive documentation proving severe financial hardship including insolvency, no assets, minimal income, and no realistic prospect of future repayment capacity. You must typically present a lump-sum payment immediately upon acceptance.

CRA settlement negotiations provide no legal protection. Wage garnishment, bank freezes, and other collection actions continue during negotiation unless you separately negotiate a temporary pause. Settlement success requires demonstrating to CRA that accepting partial payment now yields more than pursuing collection for years or receiving pennies in a future bankruptcy.

Most Canadians rejected for CRA settlement succeed with consumer proposals that offer similar 60 to 80 percent debt reduction with guaranteed legal protection and no lump-sum requirement. Licensed Insolvency Trustees structure proposals to be acceptable to CRA based on your income, assets, and what CRA would receive if you filed bankruptcy instead.

What Collection Powers Does CRA Have?

CRA possesses federal collection powers exceeding those of regular creditors operating under provincial law. The Requirement to Pay allows CRA to garnish wages and freeze bank accounts without obtaining court judgments. Regular creditors must sue you, obtain a judgment, and then apply for provincial enforcement orders—a process taking three to six months.

CRA garnishes up to 50 percent of net pay for employees or 100 percent of receivables for contractors and self-employed individuals. Provincial garnishment limits restrict regular creditors to 20 percent in Ontario and 30 percent in British Columbia and Quebec. CRA’s federal authority under the Income Tax Act bypasses provincial caps that apply to regular creditors. Federal employees in the National Capital Region facing CRA garnishment can access specialized Ottawa debt relief services and Licensed Insolvency Trustees in Ottawa familiar with public sector pension considerations.

CRA collection periods run six to ten years depending on debt type and whether you acknowledge the debt or make partial payments that restart the limitation period. Provincial limitation acts do not apply to federal tax debt. Only filing bankruptcy or a consumer proposal stops CRA collection through stay of proceedings.

Learn how CRA garnishment works and timelines to stop it in the complete CRA wage garnishment guide. Compare CRA garnishment to regular creditor garnishment in the general wage garnishment article.

Which CRA Debt Relief Option Should You Choose?

Choose the relief option that maximizes debt reduction, stops collection actions, and fits your financial capacity. Taxpayer Relief works only if penalties and interest represent the majority of your debt and you can afford to pay the full principal balance. Payment plans require sufficient income to repay 100 percent of debt plus three percent annual interest over one to five years.

Consumer proposals suit Canadians owing $10,000 to $250,000 who have steady income but cannot afford full repayment. The 60 to 80 percent debt reduction combined with immediate garnishment stop and asset protection makes proposals optimal for most CRA debt situations. You keep your home, vehicle, and all other assets while paying 20 to 40 cents per dollar over three to five years. Review the signs you need a consumer proposal to determine if this option fits your situation.

Bankruptcy discharges 100 percent of CRA debt fastest and works best when you have no assets, minimal income, or owe more than $250,000 in total unsecured debt exceeding consumer proposal limits. Be aware of Section 172.1 conditions if your tax debt alone exceeds $200,000 and represents 75 percent or more of your total unsecured debt.

Compare all five options side-by-side using the CRA tax debt calculator to see monthly payments, total costs, and timelines based on your specific debt amount and income.

Bottom Line

The five CRA debt relief options range from Taxpayer Relief eliminating penalties and interest only to bankruptcy discharging 100 percent of debt. Consumer proposals offer the best combination of substantial debt reduction (60 to 80 percent), immediate legal protection stopping garnishment within 24 to 48 hours, and asset protection—with 97 percent creditor acceptance rates reported by Licensed Insolvency Trustees. Payment plans require full repayment at three percent interest with no legal protection while negotiations continue, and direct settlement succeeds in only 30 to 40 percent of cases. Section 172.1 complicates bankruptcy for high-tax debtors owing $200,000 or more in income tax representing 75 percent or more of unsecured debt by extending discharge to 21 months minimum and potentially requiring 25 percent payment to CRA.

Use the CRA Tax Debt Calculator to compare consumer proposal, bankruptcy, and payment plan costs for your specific situation.

This article provides general information about CRA debt relief options and should not be considered legal or financial advice. Find a Licensed Insolvency Trustee or a tax professional for advice specific to your situation.

Last updated: February 2, 2026