Owing tax debt to the Canada Revenue Agency (“CRA”) is one of the toughest places a person can be financially. CRA is a government agency, with virtually unlimited powers to collect on tax debt. This is why we highly recommend being proactive and putting a plan in place before CRA begins “collecting”, as this may result in frozen bank accounts, garnishments, a lien on your house, or other unpleasant consequences.
Where Does Tax Debt Come From
Tax debts accrue for many reasons. Sometimes CRA reassesses a tax return after an audit, while at other times it is as simple as a self-employed person failing to put the tax money aside throughout the year.
It could also be the accountant’s fault – from a failure to file, poor accounting and tax advice, to outright fraud without the business owner even knowing about it. These scenarios may result in late filing penalties and interest charges on unpaid tax debt.
Regardless of how the tax debt accrued, working out a solution should be your top priority because unlike other debts, tax debt needs to be dealt with immediately to avoid the severe consequences it comes with.
How the CRA Is Different From Ordinary Creditors
In essence, owing a tax debt to the CRA means you owe the government.
Unlike other unsecured creditors, the CRA has the right to garnish your paycheque, freeze your bank account, seize your assets, or place liens against your property – all without a court order! CRA also has greater access to your financial information in terms of knowing who your employer is as well as knowing where you hold your bank accounts.
Ordinary creditors can garnish your wages as well but not until they get a judgment and a garnishee order from the court, which often takes months. In addition, creditors must provide you with several notices to make payment, and proof to the court they’ve been doing so.
Essentially, your unsecured creditors are limited in the ways they can collect the debt, allowing you some additional time before they begin more aggressive collection efforts, with CRA this seldom happens.
Common Options to Deal With CRA Debt and Avoid Problems
While owing a tax debt to CRA is an obvious problem, as a debtor, you do have a few options available to you. However, before any of them are considered by the “tax man” you must be up to date with all your tax return filings.
So file your outstanding returns as a first step – even if you’ve lost the hope of ever being able to clear your tax debt, it’s still very important to file all your outstanding returns.
Doing so makes you eligible for credits such as HST and child tax benefits – plus other potential credits. It also shows the CRA that you’re serious about solving the debt problem.
Option 1 – Ask for relief
Maybe you’ve fallen behind on taxes, or business HST or your tax return has been re-assessed…No matter what, the folks at CRA want to work with you and help you clear your balance. If you have a stable source of income and your debt is manageable, they will often work with you to create a payment plan. Note that CRA does not have the power to reduce the amount of tax owing; they can simply allow you to make monthly payments to pay the balance in full within a reasonable amount of time.
Option 2 – Bankruptcy
If your income is limited, and you’re barely making ends meet, a bankruptcy may be a good option. Under the bankruptcy laws, all of your unsecured debt would be included in the bankruptcy filing, including tax debt owing to CRA. You can read more about bankruptcy filing here.
Option 3 – Consumer Proposal
A Consumer Proposal is the best option for families and individuals who have a stable income source but are just overwhelmed by all the debt they owe.
If you’re having a hard time meeting your expenses and debt payments and the interest charges on all the debts are making it impossible to make any progress, a Consumer Proposal will enable you to negotiate a settlement with all of your unsecured creditors (including CRA) and create a 3, 4 or 5 year plan to pay back a portion of the money you owe.
Only in a Consumer Proposal filed with a Licensed Insolvency Trustee does CRA have the authority to settle on tax debt for less than full repayment.
In most cases a Consumer Proposal allows debtors to reduce their debts by 30%-60% in the form of interest-free monthly payments made over an agreed upon period of time.
Why a Consumer Proposal Is Often the Best Option to Help Settle CRA Debt
Most people find it almost impossible to pay tax debts that have accumulated over several years. Fortunately, even the CRA is bound by the Bankruptcy and Insolvency Act and debtors have real, practical options to becoming debt free.
A Consumer Proposal allows the CRA to collect a reasonable portion of the money you owe, reduces your overall debt level, removes all the garnishments and court orders and stops all future interest charges. It’s a win-win solution.
However, it’s important to understand that not everyone can submit a Consumer Proposal on your behalf. The only person allowed filing a Consumer Proposal and submitting one for consideration is a Licensed Insolvency Trustee [LIT].
If you’re facing financial difficulty and would like to speak with a consumer proposal administrator or LIT please call us at 416-665-3000 or 1-800-372-7337 for your confidential, no-obligation consultation.
Brief & Associates Inc. are Licensed Insolvency Trustees and Proposal Administrators and can help you choose the best option to resolve your CRA and other unsecured debts. We will gladly answer any questions you may have and provide unbiased advice on your debt management options in general.
Freedom from debt is possible. Take the first step today, call us.