Of all the different types of personal debt that Canadians deal with, owing taxes to the Canada Revenue Agency (CRA) seems to cause the greatest concern. While the government is, for the most part, treated as another creditor in consumer debt solutions, such as a consumer proposal or personal bankruptcy, CRA does have additional collection powers, granted to it under our tax laws.
As licensed insolvency trustees, one of the first things we advise a debtor is not to fall behind in filing your tax returns. Whether you can pay131 what you owe or not, you should file your return before the deadline to avoid additional filing penalties.
What Can CRA Do?
Often, CRA will collect tax money owed by garnishing your pay cheque or by putting a freeze on your bank account. While other creditors can also garnish your wages, CRA unlike others, does not require a court order to do so.
If you are self-employed, CRA has to the option to send a notice to the company or companies that contract your services, and garnish your contract payments at source.
CRA has the statutory right to register a lien on your house. They will also continue to charge penalties and interest until the debt is paid back in full. It is important to note that once CRA registers a lien on your home, this lien cannot be discharged by filing a consumer proposal or bankruptcy. If you find yourself in a position where you think that CRA may register a lien on your property, it is a good idea to seek out a Licensed Insolvency Trustee such as Spergel to get advice.
Can I Negotiate My Tax Debt with the Government?
Generally, it is not advisable to negotiate directly with CRA to try to reduce your debt size. Agents at CRA do not have the authority to accept a reduced amount. There is a Taxpayer Relief program that allows for the reduction of penalties and interest in some cases, including natural disasters, deaths, health problems, financial hardships and mistakes made by the CRA.
However, applying for Tax Relief is a formal process that usually requires professional help to complete properly.
Try to Renegotiate Your Repayment Terms
With tax debt, if you try to renegotiate your repayment terms directly with CRA by proving how much can afford to pay on a monthly basis. You will likely receive a questionnaire asking you to account for your monthly expenses.
Your debt will have to be paid in full, and whether or not you get relief from penalties and interest is up to CRA.
Seek Legal Protection from Tax Debt Collection
If you cannot pay your tax debt, then you would be wise to seek out the counsel of a Licensed Insolvency Trustee, such as Spergel, to protect your wages and assets through filing either a consumer proposal or personal bankruptcy.
A consumer proposal may allow you to settle your debt for less that the full amount owed. In a consumer proposal, all creditors, including the government, are presented the same proposal offer – usually a better recovery than they would receive through the bankruptcy process.
With a consumer proposal, your creditors have 45 days to vote on the proposal offer presented. If need be, your Licensed Insolvency Trustee can present counter offers to your creditors on your behalf to have the proposal accepted. If creditors representing more than half the value your debt accept the proposal, they all are bound by it, including CRA.
If CRA is your single largest creditor and has the controlling vote in such a negotiation, you may have to meet with them to work out the proposal terms. They will require that all your outstanding tax returns are filed, that you have sufficient income to make your payments and that you make installments on your current taxes, so you do not fall further behind in the next year.
Filing for Bankruptcy to Cope with Tax Debt
If you are unable to negotiate a tax debt settlement or consumer proposal, filing for bankruptcy is the last option to eliminate your tax debt. Income tax and HST/GST debts are covered in a bankruptcy and eliminated upon discharge.
If you owe CRA more than $200,000 for personal income tax debt and that amount represents 75% or more of your unsecured debts, then you are not eligible for an automatic discharge from bankruptcy. You will have to attend a discharge hearing in court during which your discharge may be made conditional on certain duties.
Dealing with tax debt is a complicated matter and requires the expertise of an experienced Licensed Insolvency Trustee to best advise you on your options.
Contact us today, at Spergel, for a free consultation, so we can review your particular circumstances and set you on the road to true tax relief.