Tax Debt Settlement: What Does the CRA Want?
How to Make a Successful Debt Settlement With the CRA
At some point in life, anyone may be a victim of a financial crisis.
One financial crisis that we all want to avoid is having a tax debt.
There may be times when you are not in a position to pay the full amount you owe to the Canada Revenue Agency (CRA) all at once.
It doesn’t make you a tax evader of course.
There may be so many reasons why you land in this situation.
It could be because you were unaware that you had to declare a certain income, or may be because your accountant made a mistake in tax calculations.
Whatever the reason may be, unfortunately you are answerable to the authorities.
There are a number of other considerations to take into account when you are trying to reach a tax debt settlement.
The CRA does have special collection powers and the authority to issue income tax credits.
But it also has numerous provisions to help tax payers come out of their tax debts.
Knowing how the CRA functions in settling tax debts can be very helpful for you in avoiding heavy penalties or legal consequences.
CRA’s collection activities
Before we go on to understand what your options are, let us first look at what CRA generally does to collect their debts.
The CRA doesn’t always have to go through the court to collect their dues.
Here are a few measures that the agency can adopt for collections:
- Garnishee your wages up to 50% of gross earnings of employment income – This can be done by other creditors as well. But the difference between the CRA and others here is that, other creditors would have to go through court and it would take months for them to obtain a garnishee order. The CRA, on the other hand, gets this power from the Canadian Income Tax Act, which means they don’t need a court review and the order can be very well issued with just the review of your local tax services office. So, under this condition, 50% of your wages from your employment will directly be credited to the CRA against your tax debt.
- Garnishee your wages up to 100% of subcontractor income – If you are not a full-time employee at any organization, this is the measure that the CRA can take to collect your tax debts. In case of independent contractors, the CRA can send a notice to the company you have a contract with to send your payments directly to the CRA.
- Freeze your bank accounts and seize any funds on deposit – In case the CRA doesn’t have a means to garnishee your income, may be because you are not working at the time, it can still collect its debts using this method. As your account is freezed you cannot access your bank account anymore and any amount credited to the account will be seized by the CRA until your debts are settled.
- Withhold certain tax credits such as your GST refund cheques – Depending on how much you owe, the CRA can also go for comparatively less rigid measures. If your dues are not sky high, the CRA may be able to settle the amount by just withholding some of your tax credits or benefits to pay down the debt owing.
- Apply penalties and interest to the debt owing if you haven’t filed any income tax returns – The CRA may assess any of your income tax returns not yet filed and may issue heavy penalties or interests against your tax debts.
- File a lien on your property – The last nail in the coffin, if the CRA fails to settle all your debts using any of the above measures, is this. The CRA can register a lien against your property without your consent, to ensure that the debt is paid if the property is sold, in case you are unable to pay the debts in full.
These are the measures that the CRA can take if you fail to pay your debts but it doesn’t necessarily mean you have to go through it all.
Here’s what you can do to avoid such strict actions and pay your debts by finding a common ground with the CRA.
Tax debt settlement options for the debtor
Negotiations or payment arrangements – The first option that you have, as in case of any debt, is to come to an agreement through negotiations with the CRA.
You can make an arrangement with the authorities to pay your debt in smaller installments over time, or as would be practicable for you, including the interests or penalties due.
In this kind of a negotiation, you usually receive a questionnaire asking you spell out your monthly expenses and income.
Through this the CRA is able to find out how much you can afford to pay monthly against your debts without impacting your livelihood.
In these kinds of agreements, you may have to pay the full debt amount as well as penalties or you may be able to avail some relief from penalties and charges too, depending on the CRA perceives your financial situation and the reason why you fell behind on taxes.
If you are certain that you won’t be able to pay up the entire amount due, despite a payment agreement, you have to take help of legal means to keep the CRA from freezing your account or filing a lien on your property.
Consumer proposal – A consumer proposal is a legal method of settling tax debts where you can negotiate with the CRA to pay less than what you owe.
In some cases, a debtor may even obtain a CRA debt forgiveness with a consumer proposal.
A tax lawyer can help you file a consumer proposal, asking for a relief on the penalties and charges, for all creditors, including the CRA.
But you still have to pay the underlying tax debt itself.
Personal bankruptcy – If you think that you will not be able to pay your underlying debts at all, this is your last resort.
This is subject to certain conditions though.
Your tax debts have to be at least $200,000 and should constitute 75% or more of your total debts, for you to get a court hearing to establish your bankruptcy.
The court generally orders you to pay a specified percentage of the debt or serve a suspension, depending on all factors considered.
Another important thing to consider here is that whether the CRA has already registered a lien against your property.
If you see that as possible, it is better to talk to a licensed insolvency trustee before you file your bankruptcy.
It is best not to file bankruptcy if your tax debts have already been registered against your property, as a lien cannot be removed by establishing bankruptcy.
However, if the CRA hasn’t filed a lien yet, they cannot file one after you declare bankruptcy.
Now that you know how the CRA works in collecting their debts, you can take informed and well-planned decisions on how to pay your tax debts.