There are no shortage of ways that you can end up owing taxes to Canada Revenue Agency (formerly Revenue Canada) and there are several different types of taxes that you can owe.
Over the years, we have seen people get into tax debt mostly because they are self-employed. However, there are also other times we have seen tax debt build up, such as:
- a person working multiple jobs where insufficient tax is withheld at source
- falling victim to a charitable donation scam
- making an RSP redemption
- having a combination of employment income and employment insurance (EI)
- experiencing an unfair audit resulting in a notice of reassessment
- making a mistake on your tax return or late filing
- not making instalment payments as required
These causes can result in a variety of different types of income tax owing to CRA such as:
- personal income tax
- goods and service tax (GST)
- payroll source deductions
- corporate income tax
- overpayment of Canada Child Benefit
Regardless of the type of income tax that you owe, once CRA starts its collection action, they have some very powerful tools to get your money. In particular, it is quite common for CRA to freeze your bank account and take all of the money in it. Another way they collect is to garnish your wages, sometimes up to 100%! If you own real property, such as a house, they also have the ability to put a lien against the title.
We always like to talk about all of the options that may be possible for dealing with debt and income tax debt is no different. Here are your options:
- Get a consolidation loan from your bank and pay off the tax debt in full. This may be difficult to qualify for as banks tend to be hesitant to loan when income tax debt exists.
- Arrange a repayment plan with CRA. Using this option, you will end up repaying 100% of the tax debt plus penalties and interest. Sometimes this can work, sometimes it won’t. It seems to depend on how fast the penalties and interest are accruing and whether you are falling behind on the current year’s income taxes as well.
- File a notice of objection. This is an option if you feel that CRA is incorrect in what they have assessed you. In order to dispute the assessment, a notice of objection is required. We would suggest you engage an accountant to assist with this. It is also important to weigh the cost of objecting versus the possible likelihood of winning.
- Make a fairness application. This is available if there are extraordinary circumstances that caused the tax debt to build. On occasion, CRA will waive the penalties and interest associated with the tax debt.
- File a Consumer Proposal through a Licensed Insolvency Trustee. This option is the only way that you can offer to repay CRA a percentage of the debt owed. In addition, it forces the CRA to stop collection action. You have to include all of your unsecured debt in the proposal, but it is definitely a practical option. The Canada Revenue Agency and the rest of your unsecured creditors have the opportunity to vote on the consumer proposal and as long as the majority agree, it is binding for all. In order for the CRA to vote in favour, you will have to have filed all of your income tax returns.
- File an assignment into bankruptcy through a Licensed Insolvency Trustee. Sometimes circumstances exist such that you can’t offer to repay a portion of your debts and this option provides the fastest, least costly option to obtain a fresh start and gain debt relief.
We have noticed during the pandemic that CRA is currently not collecting with much enthusiasm. However, that is sure to change as time progresses. Therefore, it is good to be ready and know your options. As the above represents general information about options for dealing with tax debt, please contact us to discuss your specific situation. Your first appointment is free!