Tax Debt Solutions
Are you dealing with overdue income tax debt in Canada? It’s a more common situation than you think. Small business owners are particularly prone to this problem, as are those who have faced unemployment. Many people you meet everyday have income tax debt.
Once you have confirmed how much you owe the Canada Revenue Agency (CRA), you can compare the possible income tax debt solutions.
Consulting with a Licensed Insolvency Trustee may be beneficial, as he or she will review all of your options and will consider factors such as the amount of your tax debt, level of income, job security, age, family dependents, health and other debt obligations and assets. Some possible options include the following:
1. Negotiate Payment Terms with the CRA
You may be able to negotiate a payment schedule. Contact your income tax collections officer, explain your circumstances, and offer a payment schedule you can manage. Offering a series of post-dated cheques can be an indication of good faith and may be an easy solution for smaller income tax debts. For example, if you owe $2,000, you may offer to pay $200 per month for the next 10 months by way of post-dated cheques.
The CRA will often agree to let you pay over time, but keep in mind:
- You will pay the full amount owed
- The CRA will continue to charge interest until the debt is paid in full
- The CRA will typically not accept a payment plan more than one year long
If the CRA does not accept your offer, the Agency will likely take further action to collect the tax debt. The CRA has more powers of collection than commercial creditors, and can easily register a lien against your home or garnish your wages. Therefore, you should be prepared to try a different solution.
2. Obtain a Loan to Pay Off Your Income Tax Debt
If you have sufficient income and a good credit rating, have access to a qualified co-signer or can provide an asset as security, you may be able to obtain a loan to pay off your tax debt.
Paying your overdue income taxes via a loan may be more manageable than making a payment arrangement directly with the CRA, because payment terms can be extended beyond a year, thereby fitting within your budget.
However, caution is needed. If an unexpected event such as loss of employment, addition to the family, or marital separation occurs, you may have trouble paying. Under these circumstances, if your loan has been co-signed, the bank will pursue the co-signer and make your financial problem the co-signer’s problem. If an asset has been placed as security for the loan and the loan goes into default, you may lose the asset. This could mean the repossession of the secured asset (e.g., car, boat) or foreclosure on a house where a first mortgage was refinanced or a second mortgage was granted.
3. File a Consumer Proposal
A full discussion on consumer proposals can be found on our page What is a Consumer Proposal. In general terms, a consumer proposal has these features:
- It is the negotiation of a compromise between you and your creditors, facilitated by a Licensed Insolvency Trustee.
- It can include your tax debt with the CRA.
- The proposal documentation includes full disclosure of all your assets, debts, income and expenses which have been verified by a Licensed Insolvency Trustee, your proposal (offer) to resolve the debt, and a recommendation by the Trustee.
- Creditors accept most consumer proposals since they know that the Licensed Insolvency Trustee must verify the information contained within the proposal documentation. Also, a consumer proposal offers more money to the creditors than may be realized through a bankruptcy.
- To be eligible to file a consumer proposal, your total debt (excluding your house mortgage) must be less than $250,000. If that debt is over $250,000 you can file a commercial (Division I) proposal. The commercial proposal has the same effect as a consumer proposal, but involves a more complicated process. A Licensed Insolvency Trustee can advise you.
- For your consumer proposal to be approved, more than 50% in dollar value of your unsecured creditors must vote in favour of accepting it. The approval by the majority in dollar value will bind the minority creditors.
- If certain criteria are met, it may be possible to file a “provisional” income tax return that includes your income tax that accrued from the beginning of the year (January 1) to the date of your proposal filing, and have the taxes owing from this period included in your consumer proposal. A Licensed Insolvency Trustee can discuss this process with you.
- The filing of a consumer proposal can stop a CRA payroll garnishee and lift a freeze on a bank account. The bank, however, is required to remit the funds that were in the account on the date of seizure by the CRA.
- A consumer proposal can discharge unsecured personal income tax debts, GST/HST obligations and payroll source deductions (under certain circumstances).
- If the CRA has registered a writ or charge against your non-exempt/seizable assets, the debt may become secured and non-dischargeable. Consult a Licensed Insolvency Trustee for a detailed discussion on your particular situation.
In cases where more than 50% of your total debt is debt you owe to the CRA, the CRA will have the majority of the vote on whether to accept your consumer proposal. They will require that:
- All outstanding income tax returns are filed before they will accept the proposal.
- You agree to remit monthly instalments (if self-employed) or have additional income tax withheld at source (if you are an employee) to stay current with your ongoing income tax obligations.
4. File Personal Bankruptcy
A full discussion on personal bankruptcy can be found on our webpage How to File Bankruptcy. In general terms, a bankruptcy filing is the assignment of an individual’s assets to a Trustee for the benefit of their creditors.
Bankruptcy may sound scary, but every province has laws that allow you to retain certain assets and property. You will not be left with nothing.
If your family net take-home pay (less certain limited deductions) is above specific income standards set out by the Superintendent of Bankruptcy, you may be required to advance some payment on your debts. A detailed discussion of the bankruptcy process and your specific situation can be conducted with a Licensed Insolvency Trustee in your area.
Here are some key elements of the bankruptcy process as they relate to your income tax debt:
- The filing of a bankruptcy assignment can stop a CRA payroll garnishee and lift a freeze on a bank account. The bank, however, is required to remit the funds that were in the account on the date of seizure by the CRA.
- A bankruptcy assignment can discharge unsecured personal income tax debts, GST/HST obligations and payroll source deductions (under certain circumstances).
- If the CRA has registered a writ or charge against your non-exempt/seizable assets, the debt may become secured and non-dischargeable. Consult a Licensed Insolvency Trustee for a detailed discussion on your specific situation.
- A bankruptcy assignment will allow you to file a pre-bankruptcy income tax return that includes your income taxes accrued from the beginning of the year (January 1) to the date of your bankruptcy assignment. The taxes owing as a result of this tax return will be included in your bankruptcy. You will be responsible for any new income tax debt you incur after your bankruptcy assignment. A Licensed Insolvency Trustee can discuss this process with you.
- If your income tax debt is more than $200,000 and that debt represents more than 75% of the proven unsecured claims in your bankruptcy estate, a formal discharge hearing must be held before the Registrar in Bankruptcy. A Registrar has many of the powers of a judge in bankruptcy matters. The Registrar will determine appropriate terms of discharge, if any, for your bankruptcy.
- Even if your tax debt is less than $200,000, the CRA may oppose your discharge from bankruptcy and request that you pay additional funds to your creditors. Under these circumstances, a formal hearing is held before the Registrar in Bankruptcy, who sets appropriate terms of discharge. The Registrar considers factors such as tax payment history, size of debt, age, income levels and family situation.
See our page, Bankruptcy and Tax Debt.
A Licensed Insolvency Trustee Can Help
The above information has been provided as a general overview of the options for resolving income tax debt. However, there is no substitute for the professional advice of a Licensed Insolvency Trustee.