Dealing with CRA Debt: Is Bankruptcy an Option?
Can you declare bankruptcy on CRA debt? It’s a question that often leaves many Canadians feeling overwhelmed and anxious. If you’re dealing with tax debt owed to the Canada Revenue Agency (CRA), understanding your debt relief options can be the first step towards regaining your financial footing.
Introduction
Debt can be a heavy burden to bear, impacting all facets of your life – from your mental and physical health to your personal relationships. Among the different types of debt, owing money to the CRA can be particularly stressful. In this article, we will explore the key factors surrounding CRA debt and the potential solution of declaring bankruptcy.
The Nature of CRA Debt
CRA debt can originate from various sources. It could be due to not filing your personal income tax returns, failing to pay taxes on business income, or having insufficient payroll deductions from your employer if you’re juggling multiple jobs.
When you owe the CRA money, they will impose penalties and interest on unpaid amounts. This might include a late filing penalty of 5% plus 1% of your balance owing each month. Thus, it’s advisable not to delay filing your taxes, even if you fear owing the government money.
CRA Collection Actions
The CRA has the authority to collect on debt owed through various methods. These include garnishing your wages, seizing your bank accounts, or even registering a lien on your property. Therefore, it’s crucial to act swiftly if you owe money to the CRA.
Fortunately, there are debt relief options in Canada that allow you to include tax debt, thereby putting a stop to CRA collection actions.
Debt Relief Options
Licensed Insolvency Trustees (LITs) can offer two options to deal with CRA debt – a Consumer Proposal or Bankruptcy.
Consumer Proposal
A Consumer Proposal is a powerful debt relief option that can address your CRA debt. When you consult a Licensed Insolvency Trustee, you can learn how a Consumer Proposal can include your tax debt along with other types of debt such as:
- Credit card debt.
- Personal lines of credit.
- Unsecured loans.
- Student debt over seven years old.
Consumer Proposals and Bankruptcies are the only legal solutions in Canada that can settle government debts. While both options can reduce your debt, a Consumer Proposal allows you to repay a portion of the debt while keeping your assets.
However, not everyone will qualify for a Consumer Proposal, and it may not be the right choice for everyone. A LIT can guide you through the options and help determine the best fit for your financial situation.
Bankruptcy
Once you file for bankruptcy, there is an immediate “stay of proceedings”. This means that unsecured creditors cannot begin or continue lawsuits, wage garnishees, or even contact you to request payment.
The trustee will file outstanding tax returns up to the date of bankruptcy. Any outstanding taxes or penalties owed to the CRA will be included.
Filing for bankruptcy immediately stops most creditors from taking your wages. Your Trustee will deal with your unsecured creditors on your behalf.
Clearing Tax Debt in Canada
When you file for debt relief with a Licensed Insolvency Trustee, your CRA debt will be cleared along with relief from all other unsecured creditors. However, there are some exceptions to this rule, including those who owe over $200,000 in taxes.
Why CRA Only Decreases or Forgives Debt through a LIT?
The Canada Revenue Agency is not open to informal debt settlement, nor will they accept a debt management plan through a credit counselling agency for less than the full amount owed. Simply put, for any CRA debt to be cleared, you must file for a debt relief program through a Licensed Insolvency Trustee, including a consumer proposal or bankruptcy. Otherwise, the full amount will continue to be owed to the CRA.
Impact on Credit Score
If the CRA takes legal action such as starting the collection process, going to court for a judgement, or placing a lien on your property, you will see a negative impact on your credit score. Filing for Bankruptcy or a Consumer Proposal will also have an impact on your credit score.
Frequently Asked Questions
Can I file bankruptcy on CRA debt only?
Yes, you can file bankruptcy on CRA debt only.
What happens to my CRA debt in bankruptcy?
CRA debt is treated like any other unsecured debt in bankruptcy.
How does bankruptcy affect my tax refunds?
Tax refunds may be affected in bankruptcy, but a Licensed Insolvency Trustee can help you maximize your refunds.
Can I include tax debt in a consumer proposal?
Yes, tax debt can be included in a consumer proposal.
What happens if I don’t file bankruptcy on CRA debt?
If you don’t file bankruptcy on CRA debt, CRA can take collection actions and you may face consequences such as wage garnishments, liens, or seizure of assets.
