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Tax debt lawyer vs Licensed Insolvency Trustee – when do you need which?

Posted on 18 January 2023

Written by Graeme Hamilton

Tax debt lawyer vs Licensed Insolvency Trustee – when do you need which?

Facing an overwhelming amount of tax debt? Is the Canada Revenue Agency (CRA) on your case? Not sure what to do next? Given the inordinate powers of the CRA, it is important to handle tax debt as quickly as possible. Unlike other creditors, the CRA is able to pursue legal action including freezing your bank account, and pursuing a wage garnishment without a prior court order. To avoid facing these consequences, you need to act quickly. But who do you turn to for help? A tax debt lawyer? Or a Licensed Insolvency Trustee? In this article, we explore the differences between a tax debt lawyer vs Licensed Insolvency Trustee, and share which of the two professionals you may choose for support depending on your circumstances. In spite of their differences, both tax debt lawyers and Licensed Insolvency Trustees are important players in both debt relief and insolvency in Canada and work with each other in a number of instances.

What should you do if you have overwhelming tax debt?

Given the serious consequences implemented by the CRA when they are owed a large amount of tax debt, it is important you seek a form of debt relief if you cannot afford to make your tax debt payments. The sooner you act, the sooner you can alleviate the risk of the CRA pursuing action against you. The first step of handling your tax debt is acknowledging it and reaching out for support. No matter how bad your tax debt situation, there is always a solution for you. Here are some of the most common ways to gain tax debt relief:

  • Organizing a voluntary repayment plan with the CRA. If you feel confident you can repay your tax debt, but need longer to do so, you can speak to the CRA to organize a repayment plan. Given that you can repay all of your tax debt back, they will work with you to provide an extension on your repayments. The downside of this is that you may need to pay some penalties and interest in addition to your tax repayments.
  • Get a debt consolidation loan. A debt consolidation loan is a new loan that is taken out to condense and simplify your existing separate debts. It has the advantages of often providing a lower interest rate to reduce your repayments overall, and making your debts easier to manage.
  • Make a fairness application to the CRA. A fairness application is a government led initiative that might help you to reduce or clear completely any interest or penalties linked to your tax debt. In order to successfully have a fairness application granted, you may need a tax debt lawyer to help you. You will only be able to apply if you have extenuating circumstances and are struggling financially.
  • File a consumer proposal. If you want to reduce your unsecured debts by up to 80%, including your tax debt while keeping your assets, a consumer proposal may be a good form of debt relief for you. Filing a consumer proposal is the legal process of proposing an affordable monthly repayment amount to your creditors – if accepted, your debt will be reduced and you will only need to make your manageable payments each month for a period of up to five years.
  • File bankruptcy. Bankruptcy is the legal process of assigning any non-exempt assets over to a Licensed Insolvency Trustee in exchange for the clearance of your unsecured debts. Although often considered a last resort when it comes to debt relief, for many Canadians, bankruptcy is essential for eliminating your debts and enabling a fresh financial future.

What is a Licensed Insolvency Trustee?

A Licensed Insolvency Trustee is a federally licensed professional – the only professionals in Canada qualified to provide debt relief. They review individuals’ financial situations and help them to make informed decisions on the best way to deal with their debt problems. This includes two of the most popular forms of debt relief – a consumer proposal and bankruptcy. Should you decide to proceed with either of these debt relief options, they will collect the appropriate information form you, prepare the documents, and file the necessary documents with the government. They will also help to protect you from your creditors, negotiating with them on your behalf. As well as complying with the Bankruptcy and Insolvency Act, they will ensure the debt relief process remains fair, and that you can make your negotiated payments fairly. Throughout the debt relief process, they will help you to learn how to budget, money management, and offer credit counselling too, to set you up for a successful financial future.

What is a tax debt lawyer?

In comparison to Licensed Insolvency Trustees, tax lawyers are lawyers that specialize in tax law. They practice tax law deals, often advocating for individuals and businesses with the CRA. Tax lawyers will review your tax situation, and communicate directly with the CRA on your behalf. They will represent you in court as required to resolve your tax situation. Tax law is complex, and legislation changes frequently, making it difficult to stay on top of. If you are having a dispute with the CRA or an issue, tax lawyers who know tax law inside out can help you. They have a range of strategies to help you to deal with your tax debt, and can represent you in meetings with the CRA and in all levels of tax court, including the Tax Court of Canada and the Federal Court of Appeal. Tax lawyers specialize exclusively in tax litigation and dispute resolution. Tax debt lawyers are not professionals able to file forms of debt relief on your behalf – instead, you will need a Licensed Insolvency Trustee to reduce or clear your debts. At Spergel, unlike other bankruptcy firms, you are assigned your very own Licensed Insolvency Trustee who will walk you through the entire debt relief process, instead of passing you from person to person.

Tax debt lawyer vs Licensed Insolvency Trustee: which do I need?

If you are looking to file a form of debt relief or simply need advice on managing your debts, a Licensed Insolvency Trustee should be your first port of call. They are the only professionals in Canada legally able to file all forms of debt relief, and are therefore well placed to support you on your journey to financial freedom. They are required if you are looking to reduce your debt by up to 80% with a consumer proposal, or to eliminate it completely via bankruptcy. Tax lawyers, on the other hand, may be more appropriate for more specific issues surrounding Canadian tax law. If a Licensed Insolvency Trustee feels there are contentious tax issues, your trustee may refer you to a tax debt lawyer to help. They have extensive experience of managing tax audits and appeals, resolve CRA disputes, and represent individuals and corporate clients in cases across Canada. That said, most Licensed Insolvency Trustees are professional accountants and go through years of training and qualifications and so many also have a detailed level of knowledge of Canadian tax laws. Like tax lawyers, they are also extremely well versed in the Bankruptcy and Insolvency Act. They can help you clear your tax debt as well as a number of other debts, including credit card debt, student loan debt, and payday loans. Unlike in the USA, where tax lawyers may be very knowledgeable about bankruptcy and consumer proposals, in Canada all legal forms of debt relief are administered by a Licensed Insolvency Trustee and not a tax lawyer. A tax lawyer in Canada cannot help you file a consumer proposal or file bankruptcy. If you are still unsure of whether you need a tax debt lawyer vs Licensed Insolvency Trustee, you can book a free consultation with an experienced Licensed Insolvency Trustee at Spergel. Our trustees will review your situation and advise you on the type of support you may need most.

If you are still unsure of whether you need a tax debt lawyer vs Licensed Insolvency Trustee, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees will review your financial situation as a starting point and advise you on the type of support you may need. We can help you to reduce your debt and begin a fresh financial future. Reach out today – you owe it to yourself.

Graeme Hamilton

Graeme Hamilton

Graeme Hamilton is a Chartered Insolvency and Restructuring Professional with over 10 years’ experience as an LIT (Licensed Insolvency Trustee). He is also Spergel's resident expert on bankruptcy and debt relief in the Ontario region. Prior to establishing his career in the insolvency industry, Graeme lived in Cambodia doing volunteer work with NGO's.

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