Falling behind with Canada Revenue Agency (“CRA”) can be daunting. If you have become used to living off your gross – pre-tax – income it can be a major adjust to reduce your take-home income and start accounting for the income taxes you should have been paying all along, never mind get caught up on years of back taxes. It can be a large undertaking and often people will avoid filing taxes for years and avoid communicating with the CRA to avoid dealing with this reality but that can just make matter much worse unfortunately.
What Can Canada Revenue Agency Do to Collect What I Owe?
If you have failed to pay your taxes and you haven’t kept in touch with the CRA it is possible that they will attempt to collect the debt against you through other means. CRA will always attempt to reach out by phone or email prior to taking action against you but if your ghost them they will take action to determine the debt outstanding and make efforts to collect the debt outstanding.
Issue a Notional Assessment
CRA is an odd creditor because the reality is that they do not know what you owe them until you tell them – by filing your taxes. If you fail to file your taxes they do not know what is owed however they will make an educated guess. This is called a Notional Assessment. When you have been notionally assessed CRA has guessed at the income and therefore guessed at how much you owe them. Once they have notionally assessed you they can proceed to collect against you for this notionally assessed amount.
You may not be happy with how CRA has notionally assessed you but there is a solution to this: file your taxes. Once you file your taxes they will adjust their assessment to be based on your actual income.
Requirement to Pay (RTP)
CRA can issue a garnishee called a “Requirement to Pay” against your bank account to seize your bank funds or with your employer to seize a portion of your wages. Your bank and employer have no choice but to remit funds to CRA until the full amount on the garnishment is paid. The only remedy for avoiding the a requirement to pay is to file a bankruptcy or a proposal – none of the other financial options will stop CRA from collecting.
Enhanced Requirement to Pay (ERTP)
CRA can issue a garnishee called a Enhanced Requirement to Pay (“ERTP”) to seize your bank account and wages specifically for GST and payroll (source) deductions. As a business you are required to collect and remit these amounts to CRA. Unlike taxes which is a debt that you owe the government GST and source deductions represent money that you had and kept which was never your money – this was money you were required to hold in trust for the CRA. As a result, this debt is considered a deemed trust and CRA has stronger enforcement tools for collecting such as the ERTP.
Your bank and employer have no choice but to remit funds to CRA until the full amount on the garnishment is paid. There is no remedy for avoiding an enhanced requirement to pay – once this garnishment is issued the receiving party must pay all funds required by that garnishment. Bankruptcy and proposals do not impact this garnishment – it continues to be enforceable until the full amount is paid
A Writ of Enforcement
A writ can be issued against personal property (mobile home, vehicles, equipment, etc) and real property (land, house, etc). Once issued this writ functions as a secured debtor, like a mortgage, which must be paid. This differs from a regular writ – that any other creditor might issue – which would not have to be paid if there was a bankruptcy or a proposal.
If you file a bankruptcy or proposal the CRA writ remains payable as a secured debt. Without the writ the CRA debt would be unsecured and discharged by the bankruptcy or proposal but by waiting until there is a CRA writ you will pay more unfortunately.
Taxpayer Relief Programs
The CRA sometimes grants relief from interest and penalties on tax debt, but only in certain situations.The Minister may grant relief from penalty or interest when the following types of situations prevent a taxpayer from meeting their tax obligations:
- extraordinary circumstances,
- actions of the Canada Revenue Agency (CRA),
- inability to pay or financial hardship, or
- other circumstances
Overall, approving the taxpayer relief program is at the discretion of the CRA.
What Can You Do To Avoid Collection Activity from CRA
It is recommended you make monthly or quarterly installments on any amounts owing to CRA so you can avoid owing the government money but if you already owe money for taxes what should you do?
Stay in Touch
CRA is far more disagreeable when you are not keeping in touch with them. If they call you, pick up the phone, be honest about the situation you are facing and work together with your CRA agent make a plan.
Keep Your Filings Current
CRA’s position is that you should remain compliant with your income tax filings and while they understand you don’t always have funds to be able to pay your taxes they are less understanding about failure to file taxes.
Getting your taxes caught up is important also for knowing exactly what you owe so you can make an informed plan about what to do next.
Do Not Make a Promise You Cannot Keep
When making payment arrangements with any creditor do not promise more than you can consistently deliver, month in and month out. Even if the collection agent is pushing for a higher payment do not concede – the moment you make the commitment and then fail to pay, this is seen as breaking your agreement which may result in enforcement actions being taken against you.
Bankruptcy or Proposal
It’s a common misconception that tax debt cannot be forgiven – you can include your income tax debt in both a bankruptcy or a consumer proposal. A consumer proposal involves a formal insolvency proceeding and provides you with an opportunity to repay your tax debt (or a portion of it) on more reasonable terms.
As soon as a consumer proposal is filed, the CRA has 45 days to consider it. However, during those 45 days, a “stay of proceedings” goes into effect so that all collection action is stopped, such as wage garnishments and frozen bank accounts (except the ERTP noted above).
During the consideration phase, the CRA will review the documentation prepared by your licensed insolvency Trustee including your income, expenses, and assets. CRA is a unique creditor because they do not know what they are owed until you tell them with the filing of your income tax returns – as a result you must have your income tax filings up-to-date prior to filing a consumer proposal otherwise CRA will not accept the proposal you have submitted, regardless of how good it may be.
When you file a consumer proposal CRA will likely request a compliance clause – a term that requires you to stay current on all income tax filings and income tax payments during the term of the proposal. You are likely to want to avoid any future issues with CRA and now that you are all caught up on your tax filings this requirement should be manageable moving forward so this term isn’t usually an issue.
No Debt Forgiveness, But You Still Have Options
CRA will not consider an informal settlement or offer debt forgiveness but you can get relief from your personal tax debts owing to CRA through a bankruptcy or a proposal. By speaking with one of our staff at Frederick & Company Ltd, we can review your situation and prepare a case to secure a repayment arrangement with the CRA. We handle all communication with the CRA on your behalf to get you the best possible solution to your tax debt struggles.
Ready to get started? Let’s talk today!