What Can You Do If You Owe Money To Canada Revenue Agency?
Today on Debt Free in 30 I discuss taxes, Canada Revenue Agency, and debt options with our resident Hoyes, Michalos tax expert, Trustee in Bankruptcy, Ian Martin.
Ian is both a licensed Bankruptcy Trustee and Chartered Professional Account, and he also has seven years of experience working at Canada Revenue Agency. As someone who understands both tax law and insolvency law, Ian brings a wealth of knowledge to the conversation and provides in-depth answers to many common tax debt questions.
Here are just some of the topics we discuss on this month's FAQ podcast.
Can tax debts be included in bankruptcy?
Yes they can. It is a common misconception that tax debts cannot be included in bankruptcy. The confusion generally begins when you start taking about different types of tax debts, especially personal debts versus corporate debts.
To start, personal income tax debts are eligible for discharge in a bankruptcy.
If you are a small business owner you may owe money for HST payments in addition to tax on your personal income. If you operate as an individual or sole proprietor, Ian explains that your HST debts are considered personal debts that would be dealt with through a personal bankruptcy.
If your business is incorporated, the corporation is considered in a legal sense a separate person. That means business income taxes in a corporation are the company's debts, not yours personally.
However there are corporate debts that can cross over into personal debts and those are debts you assume as a director. Ian discusses how and why corporate debts for payroll deductions and HST can become personal debts of the company's director's and that these debts can also be eliminated if they file personal bankruptcy or a consumer proposal.
Should you go bankrupt if you owe money to Canada Revenue Agency?
If you have a tax debt, Ian addressed the issue of whether or not those debts are large enough to deal with through a bankruptcy or consumer proposal. Ian explains how the answer can only be determined by completing a financial assessment. When doing so he would ask several questions like:
What kind of resources do [you] have? What kind of income do you have? What kind of reoccurring payments can you make towards it? Do you have some kind of property or assets that you could sell or refinance to come up with money to pay towards the debt obligation?
Ian explains that making the decision about what to do about your debts owing to CRA, is complicated by the fact that Canada Revenue Agency has strong collection powers and this means they may not be willing to make a deal with you directly.
the tricky part is, the person to whom you owe the money, whether it be Canada Revenue Agency or somebody else, often times, they’re kind of in the power seat in terms of dictating the time frames and the terms of repayment.
Will CRA negotiate a settlement?
Ian described a few general principals around negotiating on your own with Canada Revenue:
- Generally CRA won't accept payment terms of less than one year.
- Don't ignore CRA. They have strong powers of collection and can freeze your bank account and garnish your wages.
- You can make a fairness application to reduce penalties and interest.
- You cannot settle the actual taxes owing (principal) without filing bankruptcy or a consumer proposal.
As to the last point, Ian explains why lawyers and accountants cannot settle your actual taxes payable. They can be helpful in making a fairness application to deal with penalties and interest, or to dispute an incorrect assessment, but they cannot settle legitimate assessed tax debts. That can only be done through a licensed Bankruptcy Trustee.
In the case of settling tax debts with CRA through a consumer proposal, Ian also described the general guidelines CRA is looking for when deciding whether or not to accept your settlement offer. He explain that CRA is often unique among creditors in that they look beyond just the dollar value of the settlement to issues of character. In Ian's words, they are looking to see:
if you’re up to date with your returns, if you co-operated with them in the past. If there had been a prior insolvency, a prior bankruptcy or a proposal where taxes were one of the large issues, so they want to see have you been a problem in the past basically, but then also, how are you going to be in the future?
- Canada Revenue Agency fairness policy
- Options for dealing with tax debts
- Tax debt settlement: What CRA wants
- Guide to tax debts (slide presentation)
If you've got tax debts we recommend listening to the entire podcast with Ian as he covered these and many other issues in greater detail. You can also read the full transcript: FAQ Show Tax Debt.
If you have other general questions about tax debts or CRA, leave us a comment below. Ian would be happy to answer. For specific advice to your situation contact us today.