Income Tax Debt: Dealing with Tax Debt in Canada

Income taxes affect everyone and for some, their annual income tax return results in a debt that, combined with other financial obligations, becomes insurmountable. The Canada Revenue Agency (CRA or formally Revenue Canada) has the powers to force collections of tax related debts - including wage garnishments, bank accounts and investment seizures; they may even register a lien on a residential home. Before we discuss the options available to you when dealing with tax debt, let's take a look at the common causes of income tax debt in Canada.

Common reasons that someone owes taxes:

• self-employed individuals owing GST, Source Deductions, and personal tax;
• individuals who have cashed out their RRSPs as an attempt to get their other debts under control, only to find that not enough taxes were taken off and now they have a large tax debt;
• employees working more than one job just to make ends meet only to find out they have a tax debt at the end of the year due to working the multiple jobs; and
• pensioners owing taxes for the first time in their lives as their pensions did not have enough taxes taken off resulting in tax debts too large to manage on a fixed income;

Your Options when Dealing with Tax Debt Problems

1. Pay-off the debts – this can be done with available cash, selling assets, or even borrowing;
2. Work on a repayment plan with CRA – you need a plan that CRA will accept and that will fit with all your other monthly commitments;
3. Apply for CRA Fairness – a government program that could reduce the interest and penalties, but not the principle portion.
4. File a consumer proposal; or
5. File personal bankruptcy.

One common misconception that people have is that tax debts are different from their other debts and have special rights – this is only partially true: Tax debt is governed by tax laws, there are special rules and, in addition, the CRA does have significant collection powers compared to other creditors; however, when it comes to a consumer proposal or personal bankruptcy, taxes are generally dischargeable debts (i.e. they go away upon completion of the procedure) just like your credit card debts, bank loans, or other unsecured debts.

We suggest that you contact one of our bankruptcy offices in Ontario and arrange for a no-charge and no-obligation initial consultation with a bankruptcy trustee. He/she will assess your situation and help you make a plan for dealing with your tax debt and financial difficulties.