A string of misfortune and poor choices brought Steve and Mary to my office in Kitchener, $65,000 in debt and feeling miserable. The good news is that there was light at the end of the tunnel. Here’s the background:
Steve and Mary have been married for almost 15 years and have three young children at home. Mary works part-time to help keep child care costs down. Steve had a good paying job at a big manufacturing plant. Life seemed good, but things started to change a few years ago. First, Steve’s overtime was cut. Then he was working only three days a week. Before long, the plant was closing and Steve was permanently laid off.
It took some time, but Steve was able to find a new job. However, his wages were 25% less than what they had been. Worse, they had accumulated $40,000 in debts from a line of credit and credit cards. It’s not like they were extravagant spenders, they relied on credit while Steve was looking for work. At this point, they could barely cover the minimum payments on the debts.
Next came a decision that Steve and Mary have come to regret more than any other. A co-worker of Steve’s told him about an investment opportunity that was a “can’t miss.” He knew a guy who was looking for people to invest in a business based in Central America. It would take $5,000 to buy in, but the benefits would far outweigh the costs. Because the business was in the start-up phase, there would be significant losses in the first three years. As an investor in the business, Steve would be able to write off these losses against his employment income. Since the losses would be larger than his wages, he would get back all of the tax that was withheld from his pay cheques when he filed his tax return.
Steve was skeptical. He did do some preliminary homework, looking at the company website, but he never did meet with the business owner. Nevertheless, Steve and Mary decided to take the plunge. They used the final $5,000 available from their line of credit to invest in this business.
Steve was very nervous when he filed his taxes. He prepared the return with an estimated refund of more than $10,000. Sure enough, two weeks later the refund was deposited in the bank account. Fast forward one year and the refund was more than $11,000. Steve was starting to breathe a little easier.
That is until Steve received a notice from the Canada Revenue Agency (CRA) that he had participated in an unregistered tax shelter. Steve had a notice of reassessment requiring him to repay the refunds he had received, plus interest. The total bill was just over $25,000. When he told Mary, she started to cry. This “investment” was supposed to help them, but it was only a mirage. The CRA reassessments were being appealed, but Steve did not expect to win this fight with the tax man. He knew that he had made a mistake. He knew that the whole thing had been a sham.
Recognizing that they could not pay their debts in full, Steve and Mary scheduled a consultation with me to explore their options. It’s normal that people are anxious about speaking with me about their money problems, but they were clearly embarrassed telling me about the income tax fiasco. Furthermore, they were extremely worried about what the CRA might do. Would they garnishee wages? Would they take their house? My advice was to learn from the past, but to focus on the future. I reassured them that my role was to help them find the best option to get the debts under control.
Steve and Mary chose to file a consumer proposal. They will be making monthly payments for the next five years to repay a fair portion of their debts. The proposal deals with all of the unsecured creditors – line of credit, credit cards AND the CRA. Because the proposal is filed pursuant to the Bankruptcy and Insolvency Act, the creditors are required by law to stop any collection activity. Steve and Mary weren’t happy that they were in a situation to need my assistance, but they were happy that I was able to show them hope for a brighter future.
Learn more about tax debts from our slideshare Guide to Dealing With Tax Debts.