Does the CRA Offer Debt Forgiveness?

Canada Revenue Agency & Debt Forgiveness

As the tax season approaches, many Canadians find themselves in a predicament. Some eagerly await a refund, while others dread the possibility of owing more than they have already paid. A common question that arises during these taxing times is, “Does the CRA offer debt forgiveness?” This article will delve into the intricacies of dealing with tax debt, the powers of the Canada Revenue Agency (CRA), and the options available for those in debt.

Understanding the Canada Revenue Agency (CRA)

The CRA is a formidable creditor with more power to directly collect from you than other creditors. The accrued interest and penalties can make an already intimidating tax debt even more harrowing. Hence, it’s crucial to understand the CRA’s collection powers and act promptly to avoid further charges.

The Scope of CRA’s Collection Powers

The CRA’s collection prowess extends to garnishing your wages, freezing your bank account, withholding tax refunds and benefits, and even seizing and selling your assets. In extreme cases of deliberate tax evasion, you could face court fines or even jail time.

When the CRA garnishes your wages, they direct a portion of your paycheque straight to them. If they freeze your bank account, they can force your bank to surrender a significant portion of your savings to pay off your tax debt. This can leave you in a precarious financial situation, potentially forcing you to borrow more money to keep up with expenses like rent, mortgage payments, or car payments.

A lien placed by the CRA on your property can have devastating effects. They can even place a lien on your principal residence, which must be settled before you can sell or refinance the property. If there remains a balance after the sale, you continue to owe the CRA.

Other creditors, such as credit card companies, can use some of the same collection powers, but they require a court order to do so. Unlike them, the CRA can exercise many of these powers without a court order.

CRA Debt Relief Programs

In the face of a large tax bill that you can’t afford to pay, you might wonder, “Does the CRA offer debt forgiveness?” Unfortunately, there are no CRA debt forgiveness rules. The CRA cannot settle for a reduced payment and must pursue the full amount that you owe.

However, the CRA does offer taxpayer relief provisions that can waive interest charges and penalties on the amount that you owe.

The Consequences of Ignoring Tax Debt

If you anticipate owing the CRA tax debt, it’s detrimental to ignore the problem. Filing your taxes late will only incur higher penalties. It is better to file your taxes on time and find a solution to tax debt right away, as neglecting it can exacerbate the situation.

Exploring CRA Debt Forgiveness Programs

While the CRA’s taxpayer relief provisions can cancel interest rates and penalties for qualifying individuals, they do not reduce the principal. Under the Income Tax Act, the CRA does not have the ability to offer debt forgiveness in Canada beyond waiving interest charges and penalties. You will still have to pay the original amount that you owe.

This can pose a problem for individuals who owe more than they can afford to pay, even without added interest charges. However, you may be able to set up a payment arrangement with the CRA that allows you to pay your balance over time through several regular payments.

However, the CRA considers itself a priority creditor and can be aggressive about collecting from you. They may suggest that you borrow more money, such as a debt consolidation loan, to pay your taxes owing immediately.

Even if the CRA agrees to a payment plan, they will not reduce the principal. However, the CRA can be included as a creditor in bankruptcies and consumer proposals.

Dealing with Tax Debt

Since you cannot negotiate a CRA tax debt settlement that includes a reduction to the principal, you will have to explore other avenues to find debt relief. Although the CRA will not provide debt forgiveness on its own, tax debt owed to them can be included in the insolvency process.

Bankruptcy and Consumer Proposals

When you cannot afford to pay your unsecured debts, there are two ways to have your debts discharged without paying the full amount: bankruptcy and consumer proposals. The CRA can be included as a creditor when you file either of these proceedings.

When you file bankruptcy, your non-exempt assets may need to be sold, with the proceeds going to pay back your creditors. Even if the proceeds do not satisfy your full debts, you are nevertheless discharged from those debts and no longer owe your creditors. Your credit score will be impacted, but several essential asset types are exempt from bankruptcy proceedings, including your principal residence and some equity in a vehicle. Depending on how much you owe, bankruptcy can be preferable to the CRA placing a lien on your home.

With a consumer proposal in Ontario, you work with a Licensed Insolvency Trustee to propose fixed monthly payments that can last for a period of up to five years. Those payments are disbursed to your unsecured creditors. The majority of your creditors (according to how much you owe) will have to agree to the proposal, but if they do, all of the included creditors are bound by the agreement, including the CRA.

Tax Tips for Those Who Collected CERB or CRB

Tax debt can be even more daunting when you weren’t expecting it. If you collected CERB or CRB, you might expect to owe the CRA some amount. How much will depend on circumstances such as:

 

  • Which of the two benefits you collected.
  • How many payments you received.
  • How much you earned during the rest of the year.

 

CERB payments were not taxed at the source, meaning anyone who collected them would have to hand part of it back to the CRA. Tax planners at the time suggested saving 20% of the benefit for taxes.

In 2021, the CRB (Canada Recovery Benefit) replaced CERB. While it was taxed at the source, the CRA still requires recipients to repay part of the benefit if they earned over $38,000 in net income during the same calendar year in which they received CRB benefits.

If your after-tax income exceeds $38,000 when you file your taxes for 2021, you will have to repay 50 cents on every dollar of CRB you received over $38,000. For example, if you received $1,800 in CRB payments (for two periods, after-tax), but you earned $36,000 in the rest of the year, you would owe nothing extra. If you earned $40,000 in income for the rest of the year, you would have to return half of the benefit, or $900.

In some cases, you may receive a CRA collection letter for CERB repayment under other circumstances. For example, you may have to repay CERB because you received double payments or you did not meet income eligibility requirements. If it turns out that you were not eligible to receive CERB, even if it was an honest mistake, you would have to repay CERB. This can put people in a very difficult situation, especially if they believed income such as EI earnings, student loans, social assistance, or benefits were considered eligible income.

It can be very difficult dealing with CRA tax debt when you have a low or fixed income. If you find yourself in this situation, it’s worth exploring CRA debt relief programs. However, you may also have to explore insolvency options if it is impossible to repay what you owe.

In conclusion, while the CRA does not offer debt forgiveness in the traditional sense, there are options available to help ease the burden of tax debt. It’s always advisable to consult with a professional like David Sklar & Associates to discuss your options. They can guide you through the process and help you find the most suitable solution to your specific situation.

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