Nov 26, 2024
Introduction: The CRA Has an Array of Powers to Enforce Collection of Tax Debt
Many taxpayers find themselves in situations where they are overburdened by tax debts on top of other existing obligations with seemingly no way to climb out of the ever increasing tax debt as interest accrues. As the tax debt owing climbs higher, the CRA will employ increasing aggressive collections methods. The CRA has extensive collection powers, without the need for a court order, including:
- Garnishment of income
- Freezing of bank accounts
- Making a third party responsible to pay the debt (this only applies in certain situations)
- Putting a lien on or seizing assets
The good news is that there are options available for taxpayers to reduce their amount owing down to a more manageable number so that taxpayers can worry less about their tax debts.
Consumer Proposals
Consumer proposals are a debt relief option under the Bankruptcy and Insolvency Act that can reduce debt by up to 80%. Consumer proposals apply to unsecured debt, mean debt for which there is no asset that the borrower put up as collateral for the loan. To be eligible for a consumer proposal you must have debt that totals less than $250,000 (excluding a principal residence mortgage). When a Consumer Proposal is filed, it triggers an immediate halt to any legal collection actions from creditors. This means creditors cannot start or continue collection efforts for unsecured debts. In addition, interest stops accruing on debts included in the proposal.
A Licenced Insolvency Trustee will work with a taxpayer to review options and determine a consumer proposal that best fits that taxpayer’s needs. Consumer proposals must be accepted by the creditors and once the creditors accept this new payment plan, the individual will make the agreed-upon payments to the Licensed Insolvency Trustee throughout the proposal’s duration. Additionally, the individual must attend two financial counseling sessions during this period, focusing on budgeting and financial goal-setting. One major advantage to a consumer proposal is that it avoids the consequences of bankruptcy, including the more severe impact on credit rating. Once a consumer proposal plan is entered into, the debtor must be diligent in keeping up the monthly payment, as defaulting on the monthly payments will automatically enter the debtor into bankruptcy.
Taxpayer Relief Program
The taxpayer relief program (formerly known as Fairness Application) is a program under the Income Tax Act designed to provide a path forward for those that are facing undue hardship as a result of their tax debts. The CRA imposes high rates of interest on their tax debts, and this can cause debts to quickly balloon to unmanageable levels. It is important to note that the bar to meet in order to qualify for taxpayer relief is relatively high compared to a consumer proposal and will be given out only in cases that clearly fit within the categories.
There are four categories of situations where the taxpayer relief program may be possible. These are:
1. Extraordinary circumstances
This includes acts of god (natural disasters), civil disturbances, serious illness or incapacity, serious emotional or mental distress.
2. Actions of the CRA
Delays or errors on the part of the CRA that resulted in taxpayers being unable to file their returns on time, file with correct information, or that caused an undue accumulation of penalties and interest.
3. Inability to pay or financial hardship
Where paying the debt would cause significant financial hardship, causing the debtor to be unable to afford basic necessities such as food, clothing, housing, medical care, and transportation. In many of these cases, interest may make up a significant potion of what is owed.
4. Other circumstances
The CRA may still grant relief if your circumstances do not fall into the categories listed above. This category is highly discretionary, and it can be very difficult to predict if relief will be granted.
Tax debts can be an extreme disruption on one’s life through the collection methods that the CRA imposes. If the taxpayer demonstrates that they are taking steps to repay their tax debt, the CRA may be willing to lift some of their more onerous sanctions like a frozen bank account or garnishment of income. If the CRA has exercised their collections powers and caused a major disruption to your life, contact our team of top Canadian tax lawyers to explore your options.
Pro Tax Tip: The CRA will employ aggressive enforcement actions. Don’t wait until things become unbearable.
Tax debt is always better dealt with sooner rather than later, no matter how high the penalties and interest have accrued. There are many options available to repay the debts and leave that chapter of your life behind. A Canadian tax lawyer can work with you and the CRA collections officers to potentially suspend sanctions and determine what payment plan options are available.
FAQ
Can I dispute a tax debt or the CRA’s actions?
Yes, if you believe the amount of debt is incorrect or if you disagree with the CRA’s actions, you can file a notice of objection within 90 days of the issuance of an assessment or 1 year after those 90 days have elapsed if you attach an extension of time request. It is up to the CRA to determine if the extension of time request will be granted.
The CRA is threatening to take certain actions if I don’t pay, but I don’t have the money. What should I do?
If you are receiving these types of letters from the CRA and you are unable to pay, the best thing to do is immediately call a knowledgeable Canadian tax law firm and discuss options before interest keeps accruing. Collection officers often make threats which exceed their legal enforcement ability as a tactic to compel payment. A Canadian tax lawyer will be able to work with you and the CRA to potentially alleviate some of the sanctions so that you can return to a normal life while a payment plan is arranged.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer
