Licensed Insolvency Trustees are often contacted by individuals and business owners who are looking for solutions to help them deal with Canada Revenue Agency (CRA) debts that they are unable to repay. If you are facing a balance owing to CRA for income tax, GST, payroll or interest and penalties the good news is that there are two solutions that can allow you to have these debts forgiven. Read on for an overview of how a Consumer Proposal or bankruptcy can help you deal with tax debt.
Types of Canada Revenue Agency Debt That Can be Forgiven
Whether you are an individual with tax debt or a business owner it’s important to understand that short of paying the debt in full there are only two options to have your tax debt forgiven – in Canada these are: i) making a Consumer Proposal, or ii) filing personal bankruptcy. Both solutions are available only by working with a Licensed Insolvency Trustee.
What is a Licensed Insolvency Trustee?
Licensed Insolvency Trustees (formerly known as Bankruptcy Trustees) are the only debt help professional endorsed, regulated and authorized by the federal government. Licensed Insolvency Trustees can help you understand all of your options when it comes to debt management, and by working with a Licensed Insolvency Trustee you will be able to access legal debt solutions that can help you deal with virtually all debts.
In addition to government debts for taxes, a Licensed Insolvency Trustee can also help you consolidate and write-off student loans, as well as other consumer debts such as credit cards, lines of credit and more.
Licensed Insolvency Trustees and Insolvency Estate Managers who work with them offer free consultations to assess your situation and evaluate your options. Any other costs of administration are set and regulated strictly by the government.
Although CRA collects on money owing under several government programs, this post focuses on taxpayer debts. Read our article about Options to Manage Student Loans for more information about how a Consumer Proposal or bankruptcy can eliminate student debts.
The following types of Canada Revenue Agency-related debts will be treated like any other type of basic debt such as a credit card – meaning that in a Consumer Proposal or bankruptcy they can be settled at a reduced amount without interest, if not entirely written-off and forgiven:
- Income tax debt
- GST/HST Credit and Canada Child Benefit overpayments
- Business GST/HST debt
- Interest and penalties accrued on the above-noted debts
Source Deductions Debt
If you are an employer who pays remuneration like salaries or wages you must withhold source deductions from your employees and remit these amounts to CRA on a regular (i.e. usually monthly) basis. Typical source deductions include: CPP contributions, EI premiums, and federal and provincial income tax amounts.
Unremitted source deductions create a CRA liability for employers that may be treated differently than other types of CRA debts:
- Unpaid Source Deductions – Director’s Liability
- If you are the director of a corporation or limited company, you are still personally responsible for paying these unremitted source deductions, although this debt can be settled and/or forgiven by filing a Consumer Proposal or bankruptcy.
- Unpaid Source Deductions – Sole Proprietor
- If you have a sole proprietorship and have unpaid source deductions this debt has a more complex status than other types of CRA debts and can become what is known as a “secured debt” – meaning that CRA may have taken an ownership interest in your assets with or without your knowledge.
What Can Happen if I Don’t Pay my CRA Debt?
If you are unable to voluntarily pay your CRA debts in full, the following actions are remedies that CRA may apply:
- Charge interest compounding daily, as well as penalties for late-filed returns
- Apply a refundable credit (such as a GST/HST Credit) to your debt
- Seize your bank account, or place a freeze on its funds
- Garnish your income (this may be applied to employment or self-employment earnings as well as CPP, OAS and EI benefits)
- Register a lien on your property
- Initiate the seizure and sale of your assets
What if I Haven’t Filed my Taxes?
Not filing your tax returns in order to avoid adding to a balance owing that you already have, or in order to avoid creating a balance owing is not an effective strategy.
If you are behind in your tax filings, CRA may resort to remedies such as freezing your bank account in order to prompt your compliance in filing obligations. CRA may also arbitrarily assess your tax returns, creating a tax debt for unfiled returns based on their review of your finances.
CRA is a very powerful creditor and can access extreme means of collection action very quickly – for example, unlike many other creditors CRA does not need to obtain a court order to start a wage garnishment, and provincial limits on how much income may be garnished do not apply to CRA. If you have a balance owing that you are unable to repay it’s best to consider solutions as soon as possible and take a proactive approach; trying to make clear-headed financial decisions while CRA has taken collection measures against you is incredibly stressful.
Dealing with Outstanding Taxes and CRA Debts
Connect with a local BC Licensed Insolvency Trustee to learn more about calculating your Consumer Proposal payments to consolidate and reduce all your debts including those to CRA, or whether bankruptcy may be right for you in forgiving your CRA and other debts.
Consolidate Tax Debt in a Consumer Proposal
In addition to virtually all consumer debts such as credit cards, a Consumer Proposal can include all debts to CRA such as income taxes, business GST/HST and source deductions.
- Consumer Proposals are the only solution in Canada that can be used to avoid personal bankruptcy and settle government debts for less than the full amount owing.
- Filing a Consumer Proposal will halt interest from accumulating further as well as remove bank account freezes or garnishments that may be pending or already in place.
- Liens on your residence or other personal property may also be prevented and in some cases removed by making a Consumer Proposal.
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Write-off Tax Debt in a Personal Bankruptcy
Filing a personal bankruptcy in Canada can result in your debts being fully forgiven (written off) by creditors, both for your consumers debts as well as those owing to CRA for income taxes, business GST/HST and source deductions.
Declaring personal bankruptcy stops interest charges and will also remove bank account seizures and other garnishments, whether pending or already happening.
If CRA has already taken action to put charges against your residence or other property, these amounts may not be removed by filing personal bankruptcy, so it is advisable to act immediately before any charges are registered.
Personal Tax Debt of $200,000 or More
In a bankruptcy scenario, if your personal income tax debts are $200,000 or more and represent more than 75% of your total unsecured debts (debts not linked to a mortgage, vehicle or other asset), you will not be eligible to be automatically discharged (released) in a personal bankruptcy.
In these rare cases a bankruptcy court hearing will take place and a registrar will make a final decision as to the conditions you will need to meet in order to be discharged from bankruptcy. This may involve you paying a sum of money into your bankruptcy estate for the general benefit of your creditors, or submitting further monthly Income and Expense Reports and surplus income.
Making a Consumer Proposal If Your Taxes are not Filed
If you already have a balance owing to CRA your tax returns as well as business GST/HST returns will need to be filed up to date for CRA to determine the precise amount owing and vote in favour of accepting your Consumer Proposal.
In the event that you regularly owe money on your tax returns, your Licensed Insolvency Trustee may also include a clause in your Consumer Proposal that allows you to consolidate the exact amount owing up to the specific date you start your Consumer Proposal – even if that return is not yet due. Filing these “provisional” returns can be helpful in that you will then get a completely fresh start from the date your Consumer Proposal starts.
Provisional Tax Return in a Consumer Proposal
A provisional tax return filed will cover the period from the beginning of the current year (January 1) and end on the date you start your Consumer Proposal. A second tax return would later be filed to cover the period from the date of your Consumer Proposal to the end of the year (December 31) – any balance due from this return would be yours to pay as normal, outside the Consumer Proposal.
If you do not have any money owing to CRA, your tax returns will still need to be filed up to date based on the current tax year filing deadlines before making a Consumer Proposal. For example, if it is July and you haven’t filed your prior year returns, they will need to be caught up. On the other hand, if it is only January then you can wait to file your tax return as it is not yet due.
In some cases, your Licensed Insolvency Trustee can help you catch up on tax returns that need to be filed in order to start your Consumer Proposal.
What Happens to my Tax Returns During a Consumer Proposal?
Keeping your tax filings and tax remittances (including applicable instalments) up to date is an important part of a successful Consumer Proposal.
- Once your Consumer Proposal has been accepted by your creditors you will resume filing and paying your tax obligations (personal income tax, business GST/HST etc.) as normal.
- In the event you are entitled to a tax refund you will receive this per usual.
Declaring Personal Bankruptcy If Your Taxes are not Filed
You can file personal bankruptcy in Canada even if your tax returns have not been filed up to date.
Outstanding income tax returns and business GST/HST returns can be filed up to date with help from your Licensed Insolvency Trustee after the bankruptcy process has already begun and you are already being protected from your creditors, including CRA.
What Happens to my Tax Returns During a Bankruptcy?
If you have prior year tax returns that are not filed at the time you start bankruptcy your Licensed Insolvency Trustee will file them for you, based on the information you provide (i.e. T4s etc.). Your Licensed Insolvency Trustee will also file your pre- and post-bankruptcy income tax returns.
- Money that you owe from prior year tax returns, whether they are filed before you start bankruptcy or after your bankruptcy officially begins will be included in the bankruptcy and forgiven.
- Refunds that you are entitled to receive for unfiled prior year and pre- and post-bankruptcy tax returns will form part of your bankruptcy estate as money that your creditors are eligible to receive.
The tax return for the tax years after your bankruptcy started will be filed by you as normal. You will resume paying your tax obligations or receiving your tax refunds as per usual.
Pre- and Post-Bankruptcy Tax Returns
The tax year that you start your bankruptcy in will be divided into two tax returns (referred to as either pre- or post-bankruptcy) – the reason for this is to calculate any balances owing to CRA that will be either included in your bankruptcy, or remain payable by you.
- Pre-bankruptcy income tax returns: Cover the period from January 1 up to the date you start your bankruptcy. Any money owing to CRA from this return will be included in and forgiven under your bankruptcy, along with any balance owing from your prior year’s returns.
- Post-bankruptcy income tax returns: Cover the period from the date your bankruptcy started until December 31. Any balance owing from this return would be considered a new debt separate from your bankruptcy and will be payable by you.
Understanding how Canada Revenue Agency debts can be included in a Consumer Proposal or bankruptcy, in addition to other debts you may have, can be complex depending on your specific situation. A Licensed Insolvency Trustee can help you evaluate your options so you can determine how best to move forward.
Book your free confidential debt consultation now to meet with a friendly local Licensed Insolvency Trustee – we’re here to help you understand your options and get a plan to be debt-free.
This content is not intended to be specific legal advice; it is intended to be a simple guide in layman’s language to provide a basic overview only. E. Sands & Associates Inc accepts no responsibility for its use other than as intended. The law is an ever-changing body of statutes and decisions, and the reader is advised to seek legal counsel for specific matters relating to their situation.