Owing taxes to the Canada Revenue Agency can be a stressful situation. Unlike regular creditors, the CRA has powerful tools they can use to ensure that your tax debt is paid.
By understanding the possible tools CRA will use to collect taxes we hope you can avoid these measures by making payment arrangements or seeking out information about a bankruptcy or a proposal – the only other way to settle debt owing to CRA.
Unlike other debt collectors who have two years to start legal action against a debt, the CRA has 6 to 10 years following an assessment to start legal action in order to collect. CRA’s first step will always to be to reach out to request payment either by phone or letter. It is important to communicate with CRA as some of the more severe enforcement options CRA has are often employed when the taxpayer is not responding to correspondence or taking sufficient action to remedy outstanding payments and income tax filings.
Here are some options CRA has to collect unpaid taxes:
Withholding Government Payments
CRA will keep funds in their possession to apply these credits to outstanding debts. CRA has been known to offset GST refunds, income tax refunds and in more severe cases even Canada Pension, Old Age Supplement payments, and Employment Insurance.
CRA will also withhold sending Canada Child Benefit for parents where one or both have failed to file their income tax returns. These amount are typically not offset for debt – as these funds are considered to be for the care of the children – but accessing these funds will be delayed until the outstanding income tax returns have been filed and assessed.
They are authorized to use these options, even if you are compliant with a payment arrangement that you have already negotiated.
Demands on Third Parties
When the CRA does take legal action against your tax debt, it can issue a demand on any third parties holding funds for you, such as clients, your bank, or your employer. This is called a Requirement to Pay (“RTP”).
They typically only seek 30% of employment income but can demand 100% of the funds from your bank account.
If they are seeking funds from a business if they issue a garnishee to customers of the business they can also take 100% of the funds until the RTP is paid in full.
In order to do so, the CRA needs to wait 90 days after assessing your taxes before obtaining a provincial judgment from the Federal Court to certify the debt.
They do not have to notify you ahead of time when they are seeking this judgment or give you time to organize a legal defense, as in the case with a regular creditor.
Asset and Writs of Enforcement
The CRA can also register a writ against your property and assets, including your permanent residence, in order to secure the amount of debt owing.
This means that if you sell your property or assets, the CRA is paid from the proceeds – checkout this post to learn more about writs, including CRA writs.
The CRA must certify the debt after 90 days, and they don’t have to give you any notice.
Relief Options when you Owe CRA
Appeal Your Assessment
If you feel like the amount owing to CRA is based on erroneous information and the assessment and resulting income tax payable is incorrect you can appeal your assessment within 90 days. You can file a notice of objection to prevent the CRA from taking collection action against the disputed amount while the appeal is being reviewed.
There are instances where you may be able to successfully appeal the debt, such as when the debt was improperly calculated due to an error and can be amended.
If you cannot pay your tax debt in full, the CRA will provide a payment arrangement based on your ability to pay.
They may wish to review your income and expenses to determine a payment amount and payment schedule.
Once a payment arrangement is made, you must pay the agreed-upon amount on schedule while continuing to file your tax returns on time.
It is important to make sure the payment agreement that you agree to is a payment that you can make without worry. Do not promise a payment that will be difficult for you to manage month in and month out because you will be held accountable for missing payments – you definitely want to be conservative with your payment commitments but if you can pay more down feel free to do so.
Creditors generally prefer consistent monthly payments over erratic lump sum payments even if they would get more from the lump sum payments. They want to see consistent payments each and every month.
Apply for Assistance
CRA can cancel or waive penalties and interest when you cannot pay your tax debt due to circumstances out of your control.
This is known as Taxpayer Relief, but it doesn’t relieve you from paying the principal amount on the debt – you will still have to pay it within a timeline acceptable to the CRA. If reducing the liabilities by penalties and interest can bring your debt load down to a manageable amount then this might be an option to consider.
However, you can file a consumer proposal that includes your tax debt as well as a bankruptcy will also resolve your personal income tax debt.
A consumer proposal is an insolvency filing that helps clear your debts quickly by proposing a payment amount and schedule that works for your unique situation.
Licensed Insolvency Trustees can work with the CRA to file a consumer proposal and have it approved.
If you can put forth a good proposal, the CRA will likely accept it in order to receive funds toward your tax debt provided you are current with all your income tax return filings.
Just keep in mind that filing a consumer proposal will affect your credit score, similar to having a defaulted debt.
We Can Help You Review your Obligations and Make a Plan
When you owe taxes to the CRA, they can issue a writ of enforcement against your property, which becomes like a mortgage that you can’t get out of.
You can’t be discharged from a writ of enforcement with bankruptcy, but you can negotiate a writ using a consumer proposal – check out this article about CRA writs to learn more.
By speaking with a trusted Licensed Insolvency Trustee, you can negotiate the terms of the writ.
Our team at Frederick & Company Ltd. can make deals with the CRA, helping you address your unsecured and secured debt in order to save your equity.
Contact us today to book your free consultation!