Tax Debt Solutions

Once you have confirmed how much you owe to the Canada Revenue Agency (“CRA”), then consider your possible income tax debt solutions.  Consulting with a Licensed Insolvency Trustee (“LIT”) may be beneficial as they will typically review all of your options with you and take into consideration 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 circumstance, and offer a payment schedule that you can manage. Offering a series of post-dated cheques will be an indication of good faith by you and may be an easy solution for those smaller/manageable 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 ultimately:

  • You will pay the full amount owed,
  • The CRA will continue to charge interest until the debit is paid in full,
  • The CRA will typically not accept a payment plan in excess of one year.

If the CRA does not accept your offer, they will likely take further action to collect the tax debt.  As a result, you should be prepared to try a different solution.

2. Obtain a Loan to Pay Off your Income Tax Debt

You may be able to obtain a loan to pay off your tax debt if you have sufficient income, a good credit rating, have access to a quality co-signer or can provide security to an asset.  Obtaining a loan is beneficial in that payment terms can be extended beyond a year (thereby fitting within your budget) and would have a lesser impact on your credit rating.  However, an unexpected event may occur that would place you in a position where the payments are no longer affordable, such as the loss of employment, an addition to the family, or a marital separation.  Under these circumstances, if your loan has been co-signed, the bank will pursue the co-signer and ultimately make your financial problem the co-signer’s financial problem.  If an asset has been placed as security for the loan and the loan goes into default, then you have to be prepared to accept the loss of the asset to the financial institution.  This may include the repossession of the secured asset (i.e. car, boat) or the foreclosure on a house where a first mortgage was re-financed or a second mortgage was granted.

3. File a Consumer Proposal

A full discussion on consumer proposals can be found under “What is a Consumer Proposal” on this website.  However, in general terms, a consumer proposal has the following qualities / characteristics:

  • It is the negotiation of a compromise between you and your creditors and can include your tax debt with the CRA.
  • A consumer proposal can only be filed by a Licensed Insolvency Trustee.
  • The proposal documentation includes: full disclosure of all your assets, debts, income and expenses which have been verified by a LIT, your proposal (offer) to compromise the debt and a recommendation by the LIT.
  • The proposal process tends to be successful as creditors are aware that the LIT has to verify the information contained within the proposal documentation and the offer is something greater than what may be alternatively realized through a bankruptcy administration.
  • To be eligible to file a consumer proposal, your total debt (excluding your house mortgage) must be less than $250,000.  If your total debt (excluding your house mortgage) is over $250,000 you can file a commercial (Division I) proposal.  The commercial proposal would have the same effect as a consumer proposal, but is a somewhat more complicated process.  You should consult a LIT under this circumstance.
  • In order to be approved, more than 50% in dollar value of your unsecured creditors have to vote “for” to accept your consumer proposal.  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 would include your income tax debt from the beginning of the year (January 1) to the date of your proposal filing.  A LIT can discuss this process with you.
  • The CRA will accept a compromise on the principle amount of your debt as well as your interest and penalties.
  • The filing of a consumer proposal can terminate/stop a payroll garnishee and lift a freeze on a bank account.  The bank, however, is required to remit the funds that were in the account at the date of seizure to the CRA.
  • A consumer proposal can discharge unsecured personal income tax debts, GST 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 LIT for a detailed discussion on your particular situation.

In cases where the CRA has the majority of the vote, they will require that:All outstanding income tax returns are filed before they will accept the proposal.

  • All outstanding income tax returns are filed before they will accept the proposal.
  • You agree to remit monthly installments (if self-employed) or have additional income tax withheld at source (if you are an employee) in order to stay current with your ongoing income tax obligations.

4. File Personal Bankruptcy

A full discussion on personal bankruptcy can be found under “How to File Bankruptcy” on this website.  However, in general terms, a bankruptcy filing is the assignment of an individual’s assets to a trustee for the benefit of one’s creditors.  It may sound scary, however, every province has laws (which vary from province-to-province) that allow you to claim certain assets to be free from seizure.  In addition, if your family net take-home pay (less certain limited deductions) is above certain 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 personal situation can be conducted with a Licensed Insolvency Trustee in your area during the consultation and review of your possible debt solutions.

Some of the key elements of the bankruptcy process as they relate to your personal income tax debt are as follows:

  • The filing of a bankruptcy assignment can terminate/stop a payroll garnishee and lift a freeze on a bank account.  The bank, however, is required to remit the funds that were in the account at the date of seizure to the CRA.
  • A bankruptcy assignment can discharge unsecured personal income tax debts, GST 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 LIT for a detailed discussion on your particular situation.
  • A bankruptcy assignment will allow you to file a pre-bankruptcy income tax return that would include your income tax debt from the beginning of the year (January 1) to the date of your bankruptcy assignment.  You would be responsible for any new debt you incur after your bankruptcy assignment.  A LIT can discuss this process with you.
  • If your personal income tax debt is in excess of $200,000 and that debt represents more than 75% of the proven unsecured claims in your bankruptcy estate, then a formal discharge hearing must be held before the Registrar in Bankruptcy.  A Registrar has the powers of a judge in bankruptcy matters.  The Registrar would determine appropriate terms of discharge, if any, for your bankruptcy.
  • Even if your personal tax debt is less than $200,000, there is also the possibility that 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 would set appropriate terms of discharge.  The Registrar would normally consider factors such as tax payment history, size of debt, age, income levels, family situation, etc.

The above information has been provided as a general overview of the options available to you to solve income tax debt problems. However, there is no substitution for the professional advice of a Licensed Insolvency Trustee. The LITs on this website provide free consultations and there is no ongoing obligation following the review of your options with them.

 

In all but the simplest solutions, you will benefit from professional advice.

Contact a Licensed Insolvency Trustee near you for a free consultation – there is no risk in seeing a Trustee, and you will find out what options you have available and which one is best for you.