Whether you owe “a lot” depends on your frame of reference. A tax debt of $15,000 to the Canada Revenue Agency (“CRA”) by an individual earning $30,000 a year while supporting a family may be an insurmountable burden requiring the services of a Licensed Insolvency Trustee (“LIT”). However, dealing with a tax debt of $15,000 may be simply a matter of proper budgeting for an individual earning $70,000 per year.
Generally speaking, after the following two steps, you should consider contacting a LIT to review your possible debt solutions. Most individuals dealing with debt problems find that an earlier consultation with a LIT will provide a greater variety of possible debt solutions. In particular, dealing with income tax debts can be further complicated when collection actions have progressed to the point where the CRA has registered writs (charges) against your property and/or have commenced a payroll garnishee. Furthermore, individuals who have been struggling with income tax debts over a period of months or years will often find themselves emotionally drained and may no longer have the care or energy to pursue the non-bankruptcy debt solutions provided by a LIT.
First Step: Confirm How Much You Owe
Start by verifying how much you really owe. The best debt solution is tailored to your situation. You should never select a debt solution based on inaccurate information.
- Make sure that you have submitted all of your outstanding income tax returns and ensure your Notice of Assessments reflect all your payments. In cases where there has been a history of unfiled personal income tax returns, the CRA will on occasion arbitrarily assess an income obligation based on past income history. An “arbitrary” assessment is the CRA’s estimate of what you owe, and if not disputed or appealed within the required time parameters, the CRA can initiate collection action on these assessed balances outstanding.
- Review all of your tax returns for the past several years to ensure that all possible deductions have been claimed to reduce what you owe. Typically, assistance from a tax professional is a good investment if your tax matters are complicated.
- If your non-payment was caused by a serious event beyond your control, you may wish to consider the “Taxpayer Relief Provisions” under the Income Tax Act. This can be found in Income Tax Information Circular IC07-1. In general, this is a taxpayer’s application for relief of interest and penalties for tax years ending within 10 years of when your application is made. However, in order to be eligible for relief, the reason for non-payment has to be the result of extreme circumstances such as natural disasters, serious illness, CRA actions or serious emotional or mental distress. There is no relief available for the principle amount of your income tax obligation, only penalties and interest. The application for tax payer relief can be difficult to understand and a detailed review of Income Tax Information Circular IC07-1 should be conducted, or in the alternative, engage the services of a tax professional.
Second Step: Be Aware of the Consequences of Unpaid Income Taxes and Late Filed Returns
There are two certainties in life, death and taxes. Neither situation is something that one looks forward to and the CRA has extensive powers to enforce the filing of returns and the payment of taxes.
- Penalties and interest are charged on balances due on late filed tax returns. You should consult with your income tax preparer as to your due dates.
- In the event that returns are not filed, the CRA can make an arbitrary assessment for your income tax liability.
- The CRA can withhold child tax credits, Canada Pension Plan or Old Age Security benefits, GST credits and tax refunds until your debt is paid.
- The CRA can garnishee your bank account and paycheque directly from your employer. No court application is required and as such, your bank or employer need only be served with a “Requirement to Pay” notice by the CRA.
The CRA will typically not accept less than full payment from a taxpayer unless you engage the services of a Licensed Insolvency Trustee or are successful with a Taxpayer Relief application. From the CRA perspective, should they accept less than the full balance outstanding, they would be setting a precedent that would force them to accept lower amounts from all other taxpayers. As such, the obligation can only be reduced through a Licensed Insolvency Trustee or through the Taxpayer Relief provisions.
Third Step: Consider Possible Tax Debt Solutions
Understand the choices you have when dealing with income tax debts in Canada and choose the best solution for you. A full explanation of these options can be found on the “Tax Debt Solutions” page on this website.