We are seeing a growing number of people in Canada finding themselves owing a tax debt to the CRA. You pay taxes on your total income for the year. If you’re an employee working for a company, your employer will withhold and remit your taxes automatically, and usually, you don’t end up with the complication of a big tax liability at the end of the year. But what if you have more than one job and one employer doesn’t know about the other? What if you have pension income coming from more than one source? Are you making enough installments if you are self-employed? Outside income can lead to a big income tax debt problem.
Today’s podcast discusses ten tips on how to avoid complications with the CRA and gives advice when dealing with the Canada Revenue Agency and tax debt problems from our in-house tax expert and Licensed Insolvency Trustee Ian Martin.
If you find yourself needing tax debt help, consider talking with a Licensed Insolvency Trustee today.
Many people use “tax return” and “tax refund” interchangeably, but this is incorrect. Your tax return is the document that you, or your tax professional, complete and file with the CRA. Your return has all of your personal information on it and is where you calculate whether you owe, or are owed money. Your tax refund is the monetary amount you will receive once the CRA has assessed your tax return.
Ten Tips To Avoid A Tax Debt Problem
- File your taxes on time. You avoid any penalties and accrued interest if you do end up owing money to the CRA.
- File your return even if you don’t think you’ll owe. The government takes information from your return to calculate your Ontario Trillium Benefit and your Canada Child Benefit. You also don’t get your refund if you don’t file. They’re giving you your money back so you might as well file.
- Know your tax bracket. If you find yourself owing tax at the end of each year, do the research and see if it’s because you are in a higher tax bracket based on your total income especially if you have two jobs, take money out of RRSPs, or have other earned income. Make installments to avoid a large tax liability at the end of the year.
- Be aware of different deadlines for self-employed. Self-employed persons have the extended deadline of June 15th to file taxes, not April 30th. Although the return date is extended, know that the deadline for any amount owning is still April 30th. Again, making installment payments when you are self-employed is key to avoiding a significant tax debt at year-end.
- Should you use a tax professional? If bookkeeping and preparing tax returns aren’t your forte, leave it to a professional. You can even try using a tax preparer for a few years to understand how to do the returns correctly, and then if you’re comfortable, you can migrate to doing your tax returns on your own.
- Want to lower the taxes you pay and still get a refund? Take advantage of all tax deductions including RRSPs. The money put into your RRSP lowers your taxable income and reduces the amount you have to pay in taxes. Saving money is also a good idea for your future.
- If you owe the CRA money. If you can, make your payment on time to avoid penalties and interest. If you don’t have all the money, contact the CRA to make payment arrangements. Like dealing with any debt you may need to find ways to reduce expenses, or if it’s a significant amount, use your assets or a loan to help with that payment.
- Bankruptcy can eliminate tax debt. Bankruptcy can eliminate your tax debt, but you need to act early. The CRA can file a tax lien on property until the debt is paid. It’s essential to file bankruptcy before it gets to this point. Once the lien is placed on your house, your tax debt is considered a secured debt as it’s now attached to your home.
- Make a deal with CRA through a consumer proposal. Because tax debt is an unsecured debt, there are options to help you deal with those debts. With a consumer proposal, your trustee will negotiate a deal to repay a lesser amount with the CRA and your other creditors. If a majority of creditors agree, all creditors included must accept the offer including the Canada Revenue Agency. It’s important to know that a CRA debt consumer proposal is the only way the Canada Revenue Agency will accept an offer to repay less than the full amount of tax assessed.
- Don’t ignore your tax debts. The CRA might not call immediately while they catch up with processing your return and reviewing your assessment but when they do know that they have extensive and very powerful collection practices. Be proactive and take charge of the situation, ignoring them won’t make them go away.
Resources mentioned in this show
- Tax Debt Help – Who Do You Call? Show #84 with Ian Martin
- CRA Collections Practices
- What is a consumer proposal?
FULL TRANSCRIPT show Dealing with CRA and Tax Debt Problems #148 with Ian Martin
Doug Hoyes: On today’s show we answer a simple question, how can you deal with Canada Revenue Agency when you have tax debts? Why is this an important question? Because taxes are a big issue for our clients, we know from our Joe Debtor study that 40% of our clients owe money on taxes when they file a consumer proposal or bankruptcy with Hoyes Michalos.
Of those 40% who owe taxes, they owe an average of just under $23,000 in taxes and that represents about a third of their total debt. So why do people owe money on taxes and what can be done about it? To answer those and many more questions and to give us ten tips for dealing with CRA and tax debts, I’m pleased to welcome back on the show our resident Hoyes Michalos tax expert, Ian Martin. Ian, welcome back. how are you doing today?
Ian Martin: Very good Doug, how are you?
Doug Hoyes: I am great, thanks very much. You’ve been a guest a few times here at Debt Free and 30. About a year and a half ago you were a guest on show number 84 and I’ll put a link in the show notes to that show so that our listeners can go back and listen to that show. Today I want to cover some new areas with you. But before I do I’d like you to give our listeners the 30 summary of your professional career. I know you’ve been with Hoyes Michalos for the last eight years, what did you do before that?
Ian Martin: Well, even before that part as a trustee at Hoyes Michalos obviously I talk to people who find themselves struggling with debt so I’m very conversant with that part of that. But before that I was an employee of the Canadian Revenue Agency for almost seven years.
Doug Hoyes: Oh boy.
Ian Martin: I know you’ve teased me about that many times over the years.
Doug Hoyes: I have.
Ian Martin: But it gives me knowledge and insight about how the tax man works. I understand about taxes more than the average person does. And even before that I am a CA by trade. So, I think really the combination of education and training over the years puts me, well really over the last 20 years, it puts me in a good position to be conversant to help people manage their tax debts.
Doug Hoyes: I rescued you from CRA is what you’re saying there.
Ian Martin: Well, it was a joint effort, but yes.
Doug Hoyes: There you go, joint effort. So, I mentioned our Joe Debtor study where I said that 40% of our clients owe tax debt. So, can you give us a quick overview of the kinds of taxes we see people deal with through either a bankruptcy or a consumer proposal?
Ian Martin: Right, right. There are a lot of different ways. The first and most obvious way is on your personal income taxes. And that can come from a variety of ways. So, this would be I file my personal tax return, I have some money on it but something that a lot of people get confused on is somebody who has a small business and operates as sole proprietor so that means that they’re not incorporated. So, for that person their business activity goes on their personal tax return. And even if it is a business it is personal tax that they owe. That’s the most common example.
But then also for the sole proprietor maybe like a contractor, sub contractor, people often owe money on their GST or their HST account and that can grow without them really realizing it. So it’s another common example. I can think of two other common ones. People who have their own employees, there’s requirements just as you do for me when you pay me every couple of weeks Doug. You’re required to –
Doug Hoyes: I do, got to give money to the government.
Ian Martin: Yeah. So, right, so you’re required as my employer to withhold a certain amount of different statutory obligations. You remit that on my behalf. So then we often see people who things get tight and they either don’t fully understand that obligation or they fall behind on paying that money for their employees.
And another common example, so there’s a couple of things there that are related to businesses, but as somebody as a sole proprietor so not incorporated, but then there’s another part that is a little bit unique where somebody who is – they operate their business through a corporation. Sometimes people don’t realize that even for the corporate accounts, like the corporate HST account or the corporate payroll account, they can be reassessed personally by the Canada Revenue Agency in their capacity as the director. So often times people will incorporate to protect themselves from certain debts but there are some such as a corporate payroll or HST account that can basically pierce and can come after you personally as well.
Doug Hoyes: Yeah, so there’s a lot of different ways you can end up owing taxes and obviously unpaid income taxes being the most common one. And you talked about people who are self-employed or who owned a business which is not incorporated, it’s the same thing as being self-employed. So, when we look at our numbers about 9% of our clients are self-employed at the time they file their consumer proposal or bankruptcy and many of them were self-employed prior to that. And then ended up getting a regular job and had to file bankruptcy.
And of those that are self-employed, about two thirds have unpaid taxes. It’s a very common issue for someone who’s self-employed. On average those tax debtors owe almost $52,000 to CRA and their tax liability makes up almost half about 46% of their total debt. So, my question for you Ian is why is it so common for someone who is self-employed to find themselves so deep in debt with Revenue Canada?
Ian Martin: Right, right and that is, it’s really a variety of factors. But then also I think you’ve said it, I think it’s a very common scenario that we see.
Doug Hoyes: Well, give me a scenario.
Ian Martin: So, here’s a typical scenario. Somebody who – we see a lot people work in a lot of different work in different, let’s say construction sub trades within the housing industry. We see a lot of people who are drywallers, roofers framers, where they’re not employees. So, we’re seeing a little while ago – as an employee of yours, you’re required to hold certain amounts. So, if you’re self-employed subcontractor there’s nobody who is withholding tax amounts and paying it to the Canada Revenue Agency on your behalf.
So, I see a lot of subcontractors who number one, they don’t realize that, they don’t realize that maybe they didn’t realize it at the start. And so maybe they fell behind for a couple of years. But then in the meantime life today for the typical person, it’s pretty expensive. So, imagine, you know, a common example a young guy who maybe gets into say the roofing industry and he’s trying to pay his bills but maybe he’s got a couple of credit cards, he’s getting that credit card statement every month showing him the high interest. So if he had to prioritize, he pays that.
So, with the taxes and the Canada Revenue Agency, it’s the kind of thing where it can kind of creep up on you slowly over time where they don’t send you a bill monthly, if you don’t file your taxes for one year it’s not like they’re right on you. Sometimes it can take many years before people really realize or they perceive how bad it really is.
Doug Hoyes: Yeah and if you were an employee before and never had to worry about taxes and now all of a sudden, like you say you’re not getting a statement every month you kind of forget that there is this liability building up and then finally you get the taxes filed and it ends up being a huge number. Well, we know that according to Statistics Canada there were 2.8 million people who were self-employed workers in Canada in 2016.
So, obviously it’s easier administratively to be an employee because as you said your employer takes an amount for your taxes right off your paycheque and sends it to CRA for you. When you’re self-employed you’re responsible for making those payments yourself. So, in your experience why would anyone go through the hassle of being self-employed? It’s obviously easier to be an employee, why go through the hassle of being self-employed?
Ian Martin: And even there, like all things there’s a variety of considerations. Some people they want to be their own boss. They don’t want to work for somebody else, they feel empowered to not be answerable to somebody else. But it brings with it certain risks. And so I guess in that way you’re saying it’s a choice, it’s a choice.
But a lot of the scenarios we see, like the scenario awhile ago with, you know, people within construction sub trades, often it’s not by choice. Often there’s a lot of situations or people for all intents and purposes probably should be treated as an employee and take away some of that risk with, you know, taxes and HST and I’ll say WSIB as well.
But the way the industry is set up is the company doesn’t want to do that. So, if you want to work then you have to be a subcontractor but then there’s lots of other people as well, again it’s not by choice. Like maybe somebody’s been working at a factory for years and years and years and it got shut down, and got laid off and they’re looking for some other job opportunity that’s just not there. Even though it’s probably not the optimal time, some people do cease that to be their own boss, to try something different because there weren’t a lot of other appealing choices at the time.
Doug Hoyes: Yeah and you’re right, there’s a lot of other industries where you don’t have any choice. I mean a lot of truck drivers for example, hey you want to be our own truck driver or lease your own truck, you’re self-employed and that’s just the way it is.
Ian Martin: And what’s that doing, it’s downloading a lot of the administrational, all the costs and all the risks from the big company down to the individual who maybe isn’t property equip to handle all those challenges.
Doug Hoyes: Yeah I mean your employer kicks in for CPP and when you’re self-employed you’re paying your potion and their portion as well as doing all the administrative stuff. So, yeah it’s a big issue.
Now I don’t want to make this all about self-employed because not everybody who owes money to the CRA are self-employed. What else would give rise to someone owing money to Revenue Canada other than being self-employed?
Ian Martin: Right. And you say that and I think of two common scenarios right away. And even generally speaking when I meet with somebody who has tax issues, this is a big part of what I like to explore and whether it’s from being self-employed or other reasons we’ll talk about in a second. And for me that’s really, really important so that people indentify that and are able to make some changes going forward.
So, in answer to your question Doug, sometimes the way of the world today, especially younger generations, a lot of people are finding challenge, finding full-time permanent work. Maybe they’re able to kind of piece together, piece together a couple of different jobs in trying to secure full-time hours. The risk with that – so, even if you’re an employee now, again you’re an employee two different places, each employer’s required by law to withhold certain amounts.
But maybe the second job, the smaller hours, maybe they’re not aware of the first job. And maybe they’re following all the rules properly but they don’t take enough tax off. So, when you do your tax return at the end of the year, the amount of tax that you’re required to pay is based on your total income for the year. So, basically there wasn’t enough tax coming off the second job. That’s a very, very common scenario.
Doug Hoyes: Yeah you’ve got two jobs, they both think you’re in the 20% tax bracket so they’re taking 20% off. But when you add them together you’re in the 30% tax bracket, they didn’t take enough off and you end up owing more.
Ian Martin: Yeah or even more so sometimes people have like a very small second job that might not be very much money at all. They think it’s not a big deal but if the income is low enough maybe that second employer isn’t taking any tax off at all.
Doug Hoyes: But when you add it to the first one you’ve got to pay tax at your total rate.
Ian Martin: Exactly.
Doug Hoyes: So yeah, there’s lots of reasons why people would get into debt. And we see that same scenario with people on a pension too.
Ian Martin: Yeah that’s exactly what I was going to say. It’s very similar. Like when you – maybe people have multiple pensions, maybe they’re still working a part-time job and especially when money gets tight. If, you know, life is expensive. Maybe they have some other debts like a credit card or line of credit they’re trying to pay. It’s really hard to volunteer – even if you recognize the issue is that there’s not enough tax coming off. We call that being taken off at sores. It’s really hard to make that decision to voluntarily have someone take extra tax off when in the here and now you’re struggling.
Doug Hoyes: I need that money.
Ian Martin: I’m going to throw out another scenario we’ve talked about many times before. And this where again people that we see all the time every day where they’re struggling with their debt payments and they look at the investments they’ve accumulated all the time. They’ll look at something like their RRSP. And so it’s not a great decision but it’s understandable that people still start pulling money out of their RRSP trying to keep up with their minimum payments.
But right there again you’ve got another source of income that is taxable when you take it out. There’s legal minimums that the different, you know, that the bank or the insurance, basically where the investment is held, there’s restrictions or regulations on how much the minimum taxes are supposed to take out. But that’s where similar to a second job in hindsight it wasn’t enough tax.
Doug Hoyes: Yeah, so if I take $3,000 out of my RRSP they’re going to take, what 10% out.
Ian Martin: Right, 10%, $300.
Doug Hoyes: And if I did that every week or every month, at the end of the year I’ve taken out $30,000 or $50,000 or whatever. They should have been taking off 20, 30, 40, 50%.
Ian Martin: Right so that extra 20 or 30% that didn’t get taken off right away, at the end of the year you get that bill. But again, like we were saying before for someone who is pulling that money out, trying to keep up with their monthly payments, even if they understand what we’ve just talked about it’s really hard to make that conscious decision to have the bank take off more tax because you feel like you need it right now.
Doug Hoyes: Which is why you’re taking the money out, so, lots of different ways you can get into trouble with Revenue Canada. So, I want to spend the rest of the show giving practical advice. You’ve been a professional accountant for 20 years, you’ve worked for a big accounting firm, you spent a few years at CRA and now you’re a Licensed Insolvency Trustee with Hoyes Michalos. So, let’s give our listeners a bunch of practical tips they can use to deal with taxes. Now I ask most of my guests for one practical tip at the end of the show but from you I want ten practical tips.
Ian Martin: A lot pressure.
Doug Hoyes: A lot of pressure on dealing with CRA and avoiding tax problems and dealing with tax debts if they happen. So, I’m going to throw some stuff out here and I want you tell me what you think. So, tip number one, I think the most obvious tip and I can think of this one myself, is file your taxes on time. So, why does that matter either if I’m owing money or getting a refund, why does it matter to get them filed on time?
Ian Martin: Right and so I want to make sure we’re clear on the wording here. So, when you file your tax return, it’s the tax return is the information, it’s a document that you file to the government that says here’s my summary from last year. And then from that there’s calculated either refund, meaning they’re going to give you some money back or you have a balance owing saying I’ve got more I need to pay. So, in the situation of having a balance owing if it’s not filed on time or the amount owing isn’t paid by the April 30th deadline there’s penalties. There’s an automatic penalty for late filing and interest starts to accrue right away based on that date.
Doug Hoyes: And there’s two different things, penalties and interest.
Ian Martin: Correct, correct, two different things. There’s like a onetime hit. I’m drawing a blank on the amount. But there’s a onetime hit and then you keep accruing every month until that amount is paid. So, that can grow significantly over time. I mean we’ve seen lots of examples of people who it kind of festers in the background for years and years and years they show us their tax bill of $50,000 and almost half of it is penalties and interest.
Doug Hoyes: Yeah you can easily double the amount. So, if you don’t get your taxes filed on time you get hit with a penalty. If you owe money you’re also paying interest on that.
Ian Martin: Right.
Doug Hoyes: And of course if you’re getting a refund, you’re not getting a refund if you don’t file your taxes.
Ian Martin: Right, exactly. So, if you do have a refund file so you can get – they’re giving you your money back so you might as well do that and that money can do all sorts of different things. But also the taxman isn’t going to pay you interest. They’ll charge you interest if you owe the taxman but they’re not going to give you interest.
Doug Hoyes: They’re charge you interest if you owe them but if it’s a refund too bad you didn’t file on time, we’re not giving you interest.
Ian Martin: Right.
Doug Hoyes: So it’s a double whammy. Okay so tip number two, if I don’t expect to owe taxes is there any point in filing them.
Ian Martin: Right and I see that on a regular basis as well.
Doug Hoyes: I mean I’m not getting charged a penalty for not filing if I don’t owe.
Ian Martin: Right and that’s where fundamentally some people will say well, I know I always get a refund, I’m going to get around too. I mean yes sure, I can get a little bit of money but I don’t –
Doug Hoyes: I’ve got pay H&R Block 50 bucks to file my return.
Ian Martin: Right, it’s a pain in the butt and it’s going to cost me money to do it but I know I won’t owe money so I’m not incurring any kind of cost. But especially for people who have fairly modest incomes, they are different benefits that you will receive based on your tax information.
So, common examples would be in Ontario we have The Ontario Trillium Benefit that gets paid monthly. The GST, HST credit that gets paid every three months and a big one for a lot of our clientele is, it’s now called The Canada Child Benefit, formally the Canada Child Tax Benefit. So, the government will not determine your eligibility or the amount until you have your tax information filed. So, even if you don’t owe money you want to get that information to you so that maybe they will give you other money back.
Doug Hoyes: So, I could have five kids if I don’t file my taxes I’m not getting my child tax credits or anything.
Ian Martin: Right. Yeah, if once they use the past year’s information, it’s starts the new payments in July. And then if they don’t have your information in a couple of months they just cut it off until you show them the result.
Doug Hoyes: Yeah and I remember meeting with a guy who was pretty sure he owed a lot money because he’d been self-employed in the past, he always owed taxes and Revenue Canada was sending him these letters that said well, you haven’t filed your taxes but we’re assessing you, we’re guessing that you probably owe the same as you owed in previous years. So, because you owed $20,000 in the previous years, for the last three years that you haven’t filed your taxes we’re assessing you for the same $20,000 times three years plus the penalties, plus the interest, he owed a huge amount of money.
And I said to him well, okay are these numbers right? And he said I don’t know, I’m not an accountant, I have no idea. And I said well, file your taxes, let’s find out. And it turned out that his – he was self-employed for another year, lost money, didn’t have any income at all and then he became an employee for a couple of years. The taxes were being taken off. So, when he filed his taxes, instead of owing this huge amount of money, he actually got a small refund back.
Ian Martin: Yeah I know exactly what you’re referring to. I can think of lots of, well, maybe not lots of examples, but enough examples of people who are – if the taxman is kind of lying in the background and they’re all quiet and all of a sudden they wake up and they’re sending you these notices saying you owe 50, $60,000, I mean I can think of a lot of examples where the person gets their taxes filed and they owe literally nothing. Yeah they’re thinking they need to come see us and file bankruptcy and it turns out they owe literally nothing and then they start getting money back from the government. So, that’s again, not too common but a great way to help people.
Doug Hoyes: And if you’ve got kids and they hadn’t given you your child related benefits for a year or two there could be a big catch up.
Ian Martin: Yeah for sure.
Doug Hoyes: So get your taxes done and I realize once you file your taxes and you do owe money then Revenue Canada’s going to be pursuing you for it but at least they’re pursuing you for something you actually owe rather than something you fear that they might owe, so, okay back to the tips now.
Ian Martin: We took a bit of a tangent there.
Doug Hoyes: That’s right, we went on a tangent. So, let’s not – let’s pick up the pace here and give our listeners lots of practical advice here. So, tip number three, most employees get a tax refund every year. So, what’s your advice for an employed person who’s in the opposite situation and somehow is owning taxes every year? What should be going through their minds?
Ian Martin: Right. And I guess in a way we kind of addressed that a little while ago. Fundamentally you want to look at it and understand why is it that I owe this tax every year? So that the two kind of scenarios we talked about a few minutes ago was maybe I’m working a second job without enough tax coming off, maybe I pulled money out of an RRSP and there wasn’t enough tax coming off so that would be the first step, assess why is it that I owe taxes ever year?
And even though it might be fairly second nature for you and I without background, sometimes people – it’s too much. So maybe it makes sense to speak to other – if you have a tax preparer, usually they should be able to break that down for you to be able to give you advice. But if it’s one of those reasons like that ultimately it’s making sure that from a second job for example that you talk to the employer and you voluntarily have extra tax taken off because again, like we said before sometimes it’s very difficult if money is tight to voluntarily have an extra $50, $100 coming off each month but you’re either going to pay for it now or pay for it later.
Doug Hoyes: With interest. Yeah and you gave two examples there. One was a onetime thing, okay I cashed out the rest of my RSP, well I’m not going to have that same issue next year. So, I don’t have to be having extra tax taken off next year.
Ian Martin: Right, exactly.
Doug Hoyes: But if I have two jobs and I’m going to continue having two jobs then yes, making a plan to have extra taken off so that you don’t end up owing kind of makes sense.
Ian Martin: Right. You identify that that is a recurring risk and you take steps to stop that from happening every single year.
Doug Hoyes: And don’t let it happen again. Okay so tip number four, income taxes and you already mentioned this, for most people are due April 30th. So, I want you to explain the difference between when a self-employed person file their taxes an when everyone else does and what’s your advice to ensure they don’t end up with a big tax bill when they file?
Ian Martin: Right and I think I was making the distinction earlier about the difference between a return and a refund. I mean with a lot of people use those words interchangeably where they don’t mean the same thing. So, I remember the tax return is the document saying here’s my income information from last year where from that you calculate whether you have a refund or a balance owing.
So, for a self-employed person they’re allowed to file their return, again the information by June 15th so that’s later than the normal deadline that you and I would have as employees for April 30th. The catch is if there’s an amount owing on that return the amount was still due by April 30th so a lot of times people fall into the trap, they just think oh I can file my taxes on June 15th, they don’t realize that they had to pay the bill by April 30th.
And again if we’re seeing people who are self-employed, that means that there’s some issues that have been going on where they haven’t been making voluntary payments, they call them installments. If somebody hasn’t been making voluntary payments throughout the year then that’s a situation where most likely they will be owing money that had to be paid by April 30th even if the return could be filed later.
Doug Hoyes: So that’s a key point. There’s two different dates, the taxes for everybody though are due April 30th, it doesn’t matter who you are.
Ian Martin: Yes.
Doug Hoyes: So, okay tip number five them related to that should you use a tax professional to do your taxes or should you just do them yourself.
Ian Martin: Yeah and I guess my answer to that is, maybe, it depends. Maybe for somebody who is self-employed, who, you know, works really hard, probably works really long hours and is probably really good at his or her particular trade but the bookkeeping, the tax return, stuff like that, maybe it’s not their forte or maybe they just don’t have the time just from a practical sense. Maybe they don’t have the time to invest to be competent enough at that.
If that’s the case it makes a ton of sense to have a bookkeeper helping you either monthly or every three months with preparing things like your HST returns, your payroll returns if you have employees and then also assisting you with your end of year tax returns. And again it’s a challenge if money’s tight. Sometimes it’s difficult to voluntarily pay someone else for something when you say you can do it yourself. But I think you need to really have a reasonable assessment of the circumstance and say well if I haven’t been able to do this for the last three yrs, five year, 10 years, what is going to be different for this year? Am I going to be able to get over the hump and do these things for myself or does it make sense to spend a few hundred bucks to have someone assist me with this?
Doug Hoyes: Yeah, I mean we can all change the oil in our car ourselves but is it worth it? Evaluate your own individual circumstances and see.
Ian Martin: Yeah and even for an individual who – I mean as an accountant, as a tax professional, as, you know, the kind of background I have, I mean I would never pay somebody to do my taxes because they’re not that complicated and I don’t feel overwhelmed by it. But for a lot of people even when it’s a straightforward return, they feel so overwhelmed when they hear income taxes and they see, you know, they see the tax return and all these line numbers and it just can get very, very overwhelming.
So, this is where me going to lots of different, you know, high volume tax preparation companies I think is a pretty good business for those places. We’re not going to name names but even like a fairly simple tax return if you go to a big company is easily $60, $70, $80 or more where I mean maybe there’s a benefit going to a place like that to make sure that your, you know, the return is proper that you’re claiming all the normal things that you’re entitled to.
But if that’s the case, if you’re paying something like that every single year for a tax preparer to literally punch in a couple of slips to a tax program, there’s inexpensive tax software, I mean there’s software that is free of charge that can really walk you through how to do things simply. So, I get it, I get it that it can be overwhelming but maybe investing a couple of years cost and then understanding it enough so you don’t have to pay that money every year. I mean that’s probably a good balance.
Doug Hoyes: Yeah if your situation is the same every year you can probably figure it out every year. If there’s changes then maybe it does make sense.
Ian Martin: Right. If there’s a change then maybe it makes sense to have a professional confirm okay, how does this change, factor into my taxes this year?
Doug Hoyes: Sure, have someone that knows what they’re doing. So, okay so tip number six I want to lower the taxes I pay and I want to get a refund so what’s the most common way to do that? How can I pay less taxes?
Ian Martin: Right so the simple, we’ve referred to this already in different ways, in an RRSP. So, it’s a Registered Retirement Savings Plan and the benefit of doing that when you put money into an RRSP you get a deduction. So, what that means is if I put $5,000 into this kind of investment I don’t have to pay tax on $5,000 of my income. So, it really – when you calculate at the end of your year on doing your return how much tax you have to pay for the year it can significantly lower it.
And this is one of the examples of how the federal government, they’ll have different programs worked into, you know, the federal tax system or other systems to effectively provide inducements trying to incur certain kinds of behaviour. So, whether it’s Mr. Trudeau or future administration, they’d much rather have us if possible take money now and save it for the future so that down the road people aren’t struggling, people aren’t as reliant on different social services, so, trying to think ahead. So, they’re trying to motive us to think ahead.
Doug Hoyes: Right. So, whether an RSP makes sense or not of course depends on your situation, what your tax rate is if you’ve got other debts maybe the money should be going towards that. Again, it’s something to think about and again, it’s based on your own personal situation.
So, okay we talked about, you know, paying down debt. Let’s go to the last three tips and since this is Debt Free in 30 let’s talk about debt. So, I want to make the last three tips ways to deal with Revenue Canada Debt, CRA debt. So, tip number eight what’s the first option to consider if you find yourself owing money to CRA?
Ian Martin: Well, I’d say that just whether it’s Canada Revenue or any debt that the goal should be to try to pay it in full and that means looking at your expenses, is there a way to reduce expenses? Is there some way to utilize your other assets? Maybe you’re a homeowner where you can borrow against the equity that you built up.
Some of that – it can be challenging though with the government because they’re not on you every month or even every year, the challenge there is that that amount that they’re looking for once they wake up the amount that they’re looking for sometimes it’s just simply too much to be able to work out through a monthly payment plan or maybe even if you do have a house maybe the amount with all the interest and penalties far exceeds the equity that you’ve built up over the time frame.
So, ideally you’re able to work it out. People, you remember this, you get feedback from people all the time when they’re trying to speak with CRA collectors. Like any large organization it can be really inconsistent in terms of the treatment people receive. Sometimes people encounter collectors who are really reasonable and take a bit of a sympathetic ear to a tough situation. And other times simply not, other times it’s very much, you know, we need the money by this time or else. So, that’s – that can be the challenges. Like if it grows over three or four years then all of a sudden you’ve got the bloodhounds on you, are you going to be able to come up with, you know, 50, $60,000 in a couple of months to get them off your back?
Doug Hoyes: Well, and they’ve got the power obviously to do things like freeze bank accounts, put a lien on your house and garnish your wages. So, if you’re at the point where that’s happening then that’s clearly not something you can just discuss with them and try to work it out. So, okay so tip number nine then, the average person on the street assumes that even if you go bankrupt that doesn’t eliminate your tax debt. Now I know that’s not true. Explain how a bankruptcy can deal with tax debt.
Ian Martin: In the vast majority of situations a tax debt is treated like any other debt. Like a credit card, a line of credit, a payday loan.
Doug Hoyes: Right, so it’s pretty simple.
Ian Martin: Right, in most situations, so, typically like those that debts are what we call unsecured debts where they don’t have any kind of lien registered against an asset. So, a form of a secured debt would be something like a mortgage or a car loan where a bankruptcy does not remove that lien from the related asset.
So you said this a moment ago that one of the powers that the Canada Revenue Agency has if the tax debts kind of fester for too long and they don’t get dealt with, if you’re a homeowner they have the power without your consent to register a lien against your home. So, if things are getting to that point where there’s negotiation going on, there’s threats they’ve already frozen your bank account, it’s not very hard for them to figure out through the resource that they have available that you have property in your name. So, without your consent they could register a lien against your property.
And then if you subsequently go bankrupt it doesn’t automatically remove that lien. So, the idea fundamentally is I go bankrupt, I complete my bankruptcy, I’m discharged from bankruptcy, it released me from my unsecured debts. But if the government proceeded to do that lien before you did the bankruptcy, they’re not unsecured anymore, they’re secured against your property and the bankruptcy does not automatically remove that secured debt.
Doug Hoyes: Yeah so it’s not something you want to leave until they get to that point. But the key point that is taxes are included in a bankruptcy just like other debts. There are some special rules that may kick in in very unusual cases but obviously you can give your office a call.
Ian Martin: Right and that’s when we’re talking to people we want to make sure we understand the details, make sure if some of those were situations do apply, we address that before we jump the gun on situations.
Doug Hoyes: Which is what we do with every debt, I mean there special rule that apply for student loans and things like that.
Ian Martin: Exactly.
Doug Hoyes: So, okay so that’s simple enough. So, tip number 10, final tip of the day. So, if I can’t make a deal with Revenue Canada because I owe too much and I don’t want to go bankrupt maybe because as you described I own a house or something that has some equity in it. And I don’t want to just do nothing because I’m afraid they can garnishee my wages or put a lien on my house then, you know, tip number 10 what’s another option that deals with tax debt, and I’m setting you up here because I know the answer to this.
Ian Martin: Yes, I see where we’re going.
Doug Hoyes: But what’s another option that deals with tax debt but doesn’t have the downside and the risks of all the other options.
Ian Martin: Right. So, what you’re referring to is a consumer proposal.
Doug Hoyes: That’s exactly right, a consumer proposal is what I’m referring to.
Ian Martin: Thank you. You kind of lobbed that right up there for me Doug.
Doug Hoyes: A nice soft ball.
Ian Martin: So, but right there that’s where again for any kind of consultation I’m doing with somebody it’s really what we’ve described here where what the first part is what is the situation? Is there a way for you to pay back the debts? And if the answer is no then in most situations it’s not realistic to just ignore the debt. Tax debts don’t just go away, credit card debts don’t just go away. So, then if the debts are too much but you need to do something to protect what you still do have in terms of your assets and your wages most times the conversation starts to focus on whether a bankruptcy or a consumer proposal would be the better option for you.
So, a consumer proposal fundamentally is where we’re acting as the administrator, the truest, the licensed trustee is acting as the administrator of the proposal. And we’re trying to effectively broker a fair deal between the two sides. We have the person who owes the tax debt, there’s the Canada Revenue Agency who is owed the money. But a proposal can include tax debts, it can obviously include other debts like credit cards, lines of credit. So, just like in bankruptcy a consumer proposal can be an effective way to deal with the tax debts.
Doug Hoyes: So in your experience does Revenue Canada play ball in a consumer proposal? And you’re exactly right, a consumer proposal’s a deal. Everybody you owe money to has to – they get a vote in the proposal. And it’s – again, we’re oversimplifying because there are different types of proposals but generally speaking it’s majority rules. So, if you owe $100,000 of 50,001 vote in favour then the proposal goes through. So if Revenue Canada, CRA is the biggest creditor, or one of the largest creditors, what are the chances that they’re going to say yes to the proposal?
Ian Martin: Well, in my experience and you said I’ve worked here for about eight and a half years now, and I really feel like there’s been a change in the climate, specifically with Canada Revenue Agency over that time. So, there were sometimes where – fundamentally they take it on a case-by-case basis, so that’s number one. We’ve seen by a lot of the big banks it’s just very structured, very regimented, you get to hit their targets in terms of how much money they want back.
Canada Revenue Agency is very case-by-case. So, I don’t discourage people from doing a proposal if it’s taxes but we need to be prepared for a few more questions than if it was straightforward bank debt. So you should have, it’s usually not face to face anymore but usually there’s at least a couple of calls like either in person or a phone call to review the details of the proposal. And if they’re satisfied that it’s provided them a fair rate or return, they’re satisfied that it’s providing a better rate of return prepared to if a person of a bankruptcy, which is fundamentally what the proposal’s about, right?
Doug Hoyes: That’s the key.
Ian Martin: And they’re satisfied that you can afford the payments that you’re offering and that you’ll be a good tax citizen moving forward, that you’re not at risk of having a reoccurring tax debts. It’s been a long time since I had a real issue getting the Canada Revenue Agency onboard with a proposal.
Doug Hoyes: So if makes sense then there’s a very good chance we can get them to agree to it. Well excellent, thanks Ian. That’s a great way to end it. You gave us 10 great tips. So, what’s your final piece of advice then before we close the show?
Ian Martin: Well, I think it’s basically don’t ignore it. I mean if you’re to the point where you know that there is a tax issue going on, don’t just ignore it. The challenge that we talked about before is that taxes can kind of grow kind of in the background silently, quietly. But once they wake up, once the collectors are coming after you, sometimes they can be too late to try to work it out on your own. So, if possible try to be proactive. But if you are to the point where it is too late then certainly me, you, our colleagues, this is what we’re trained to do, sort through the situation and find the right answer for that particular person in front of us.
Doug Hoyes: Absolutely. Yeah it’s kind of like the elephant. It’s sleeping for awhile but then when it wakes up, it tramples everything in its path.
Ian Martin: I prefer a hibernating bear.
Doug Hoyes: Hibernating bear. There we go, that’s a better way to put it. But you’re right, tax debts and most other debts aren’t just going to go away on their own and certainly with tax debts there is no statute of limitations that makes them go away. So, it’s something you’ve got to deal with. So, Ian great thanks very much. That’s great advice. Thanks for being here.
Ian Martin: Thank you Doug.
Doug Hoyes: You can find more about how to deal with tax debts on hoyes.com. Ian and the whole Hoyes Michalos team of course offer no charge consultation so if you have tax debt or any other kind of debt by all means give us a call.
That’s our show for today. Full show notes including a full transcript and links to everything we discussed today can be found on our website at hoyes.com that’s h-o-y-e-s-dot-com. Thanks for listening and if you know anyone who has tax debts please share a link to this show with them. Until next week, I’m Doug Hoyes. That was Debt Free in 30.