Understanding the Reality of Tax Debt
Tax debt, an obligation owed to the Canadian Revenue Agency (CRA), is a serious matter that can be quite daunting. The CRA has extensive powers to recover tax debts, which are arguably more formidable than those of typical creditors.
It’s no secret that the CRA can impose severe penalties, withhold certain government benefits and even freeze your bank accounts or garnish your wages without needing a court order. However, the silver lining is that there are several effective strategies to permanently resolve tax debts owed to the CRA. These include proceedings under the Bankruptcy and Insolvency Act (BIA) such as Bankruptcy and Consumer Proposal.
This article explores the truth about tax debt, the collection powers of the CRA, options for debt repayment, and what to do when paying off the debt seems impossible.
Taking Immediate Action on Tax Debt
Upon discovering that you owe taxes to the CRA, it’s essential to take swift action:
Pay the full amount owed by the CRA’s set deadline.
For personal income tax debt, the deadline is typically April 30 of the following year. For instance, any taxes owed in 2022 must be paid by April 30, 2023.
Note: Self-employed individuals have until June 15 to file personal tax returns, but outstanding taxes are still due by April 30.
If you’re unable to pay by the April 30 deadline, make payment arrangements immediately.
If you can’t reach an agreement, consult a Licensed Insolvency Trustee as soon as possible to explore alternative options.
Note: The current interest rate set by law is five percent annually (compounded daily), effective from January 1 to March 31, 2022.
Consequences of Non-Payment
The CRA is serious about collecting tax debt. It has a large team and extensive resources to recover any outstanding taxes. Here’s what you can expect if you miss the April 30 payment deadline.
A CRA collections officer will handle your case.
The collections officer will try to establish a payment plan with you.
The CRA may take legal action if you fail to meet the payment arrangement or pay the outstanding balance, leading to severe consequences.
Before initiating legal action, the CRA must:
1. Attempt to provide a verbal legal warning by phone
2. Send a written legal warning letter
Note: The CRA will typically not start legal action until 90 days after the mailing date of the notice of assessment or reassessment.
The CRA can issue a requirement to pay (RTP) to a third party that owes you money or holds funds for you.
This could be another person, your employer, a bank, or other sources of funds.
The RTP instructs the third party to redirect the funds towards your debt. The CRA can do this without a court order under section 224 of the Income Tax Act or section 317 of the Excise Tax Act.
The CRA can issue a set-off to redirect funds owed to you by any federal government department or agency towards your outstanding debt.
The CRA can certify your debt, making it a matter of public record and allowing the CRA to proceed with asset liens and seizures.
In cases of debts at risk of not being collected, the CRA may advise you verbally that the debt has been certified in Federal Court.
1. **Registering a lien on assets:** Once the debt is certified, the CRA can register a lien against your assets and property, securing the amount of debt owed.
2. **Seizing and selling your assets:** If your debt remains outstanding, the CRA may get a writ or memorial to seize and sell your assets and property.
If the CRA sells your assets, the proceeds will be used to pay:
1. Your tax debt;
2. Any costs charged by the bailiff hired to sell the assets on behalf of the CRA.
Any remaining tax debt not covered by the proceeds of the asset sale will still be your responsibility.
Consulting a Licensed Insolvency Trustee
A Licensed Insolvency Trustee (LIT) is a federally regulated financial professional who is legally able to administer Bankruptcies and Consumer Proposals in Canada.
These two debt solutions can handle debts owed to the CRA. One of their most significant benefits is a stay of proceedings, which:
Halts all current collections action by all creditors, including the CRA.
