As a licensed trustee, I meet with a lot of people who owe money to the Canada Revenue Agency (CRA). Though tax debts are included in a consumer proposal or personal bankruptcy, there is an assortment of considerations that are unique when trying a tax debt settlement with the tax man. In this article, I will review the special collection powers that the CRA has, as well as the options for making a settlement arrangement or filing bankruptcy when you have CRA debts.
What Can CRA Do?
The most common collection activity is for the CRA to garnishee your pay cheque or freeze your bank account. Other types of creditors can do this as well, but there is a difference. For other creditors, obtaining a garnishee order from the courts typically takes several months with a variety of notices being sent to you. With the CRA, the authority comes from the Canadian Income Tax Act. All that is required is the review from the proper authorities in your local tax services offices. No court review is required.
If you are self-employed, perhaps you are not worried about a wage garnishee. However, the CRA can send a notice to the company that contracts work to you. Upon receipt of such a notice, the company is required to send to the CRA the money that would be otherwise paid to you for the work you have done.
The final CRA collection tool that I will mention is the statutory lien. Basically, the CRA has the right to register a lien against your house without your consent. It’s kind of like having a second mortgage.
Tax Settlement Options
The first option with any debt is to attempt to negotiate repayment terms. The CRA is no different. Expect to receive a questionnaire requesting you to outline your monthly living expenses. This is an attempt to determine how much you can reasonably afford to repay on a monthly basis. Ultimately, you’ll be able to keep up with the required payments or not. Be aware, you will have to pay back all of tax debts and may or may not receive a reprieve from penalties and interest.
If the time for negotiation has run out, you have to seriously consider legal protection of your wages and assets. The legal means to stop CRA collections is to file a consumer proposal or personal bankruptcy. Either of these options requires the assistance of a licensed bankruptcy trustee.
Contrary to popular opinion, income tax debts are included in a consumer proposal or personal bankruptcy. However, each of these forms of debt relief has special considerations with respect to the CRA and the settlement of tax debts.
For debts like credit cards and lines of credit, banks will often agree to a accept where repayment terms where you pay 25% to 30% of the debt. With the CRA, it is a little bit more unpredictable. Trying to estimate a certain percentage is folly as the CRA collectors take each proposal on a case by case basis. They will consider factors like your budget, if there has been a prior proposal or bankruptcy, as well as the risk of you incurring tax debts in the future.
With bankruptcy, there are two special considerations that I want to highlight.
- First, if your tax debts are $200,000 or more and represent 75% or more of the total debts, a court hearing will be required to establish the terms of discharge from bankruptcy. The court will consider factors like conduct, prior bankruptcies and ability to make payments. It’s common that the outcome of such a hearing would be a court order to pay a specified percentage of the debt and/or serve a suspension. The court does have the option to refuse the discharge altogether, but that would only be used in very extreme situations.
- Second, being discharged from bankruptcy does not remove a tax lien from your property. This is referring back to the CRA’s ability to register a lien against your property without your consent. If you think there is a possibility that this has already happened, you should discuss it when you are meeting with the trustee before filing bankruptcy. The trustee can talk to you about how to verify if and for how much a lien is registered. If most or all of the tax debt has been registered against your property, it probably would not make sense to proceed with filing bankruptcy unless you had other significant debts. However, the CRA cannot file a lien after you have filed bankruptcy.
The bottom line is that the CRA has a lot of extraordinary powers to collect debt. Even though they are often slow to react, it does not mean the threat is not real. If you are feeling unsure of how to deal with your tax debts, contact one of our Ontario locations to discuss your options.