Tax Debt Help - What You Need to Know

Tax Debt Help – What You Need to Know

When you owe an income tax debt to Canada Revenue Agency (CRA), affectionately known as Her Majesty the Queen, there are some important things that you need to know. It is one thing to owe money to a bank, credit card, or payday loan place however, it is quite different when you owe money to the Government of Canada. You see, the Government knows a lot about you and has created some very powerful laws to allow them to collect. As a result, this type of debt requires your attention in a more urgent way. If you need tax debt help, the following is what you need to know.

The Collection of the CERB Is Going to Be a Mess

Many Canadians were forced to apply for the Canada Emergency Response Benefit (CERB) during the start of the pandemic in the spring of 2020. In order to qualify, a person had to have earned and reported a certain level of income during 2019 and early 2020. A total of $2,000 a month of CERB was paid out for several months. Now, CRA is starting to question whether some people were eligible to receive it. Ominous letters are currently being distributed questioning whether you were eligible and giving you a chance to voluntarily repay it.

If it turns out that you were not eligible, then CRA will be collecting all of the CERB back from you. Dollar for dollar. Likely with interest.

Even if you were eligible, the amount you collected will be reported on your 2020 personal income tax return possibly creating a tax debt. For instance, if you are in a 20% personal income tax bracket, $2,000 per month x 20% would translate to a tax debt of $400 per month. When you go to file your taxes this extra, unexpected tax bill could be a bitter pill to swallow.

What if You Have Not Filed for Years?

Sometimes when people look to us for help with their back taxes we find out that personal tax returns have not been filed. This could be for five years, ten years, or maybe not ever! How then can they be talking with us about tax debt relief?

When you don’t file a required income tax or GST return, Revenue Canada will eventually arbitrarily assess that tax return. That means that they will simply take a guess based on your industry, the information they have on hand, and previous tax returns if they have them. In addition to guessing at what they think you might owe, there are additional levels of debt packed on:

  1. Penalties – a tax penalty for late filing, which doesn’t sound like much however it can be as high as 17%
  2. Interest – for the tax debt principal and penalties not paid on time
  3. Installment penalty and interest – for not prepaying your income taxes for the year if you are self-employed

Next Steps for Tax Debt Help

Once you have received the dreaded Notice of Assessment or Notice of Reassessment from the Canada Revenue Agency, your income tax debt is officially on the books for the Government. They can then crank up their collection activity. This could include putting a garnish on your wage, draining then freezing your bank account, or putting a lien on real estate that you own. Yikes! What should you do at this point?

1. Contact your Accountant. The best-case scenario would be to contact a Chartered Professional Accountant (CPA) as they are well trained to understand what has happened. The CPA will be able to give you some practical options to consider such as:

  • File the outstanding tax returns. The arbitrary guesses made by CRA might be horribly wrong. Once they receive your actual tax return the assessment could fall or disappear entirely.
  • Consider filing a fairness request. This could be applicable if there were unusual circumstances that caused you to not file your tax returns on time.
  • Consider filing a notice of objection. This applies if you and your CPA determine that the CRA is just plain wrong in their decisions. This could develop into lawyers getting involved and costs can rise substantially.

2. Contact CRA and arrange for a monthly payment plan with them. This should prevent them from dropping their heavy hammer of collection on you. However, look closely if the monthly payment is actually moving the debt level down as future penalties and interest continue to grow on the current year’s income tax debt.

3. See if you can borrow to pay off the income tax debt. This might be available from your bank or family.

4. Contact a Licensed Insolvency Trustee who will review what options are available to help you.

What if the Income Tax Debt Is Just Too Big?

The CRA might agree to a payment plan, but what if your payments are not making a dent? The tax debt might have too much momentum to pay down. You could be paying thousands of dollars over time just to tread water and stay at the same place. It might also be difficult to qualify for a debt consolidation loan. If this is the case then you need to look to some more powerful tools to deal with Her Majesty.

There is a common misunderstanding that you can’t get relief from the Income Tax Department. Can you make an offer to settle on your tax debt? In fact, there are two ways that you can find relief where you don’t have to repay all of it, or possibly any of it. Sounds too good to be true? Not so. The following two options are federal government options available from coast to coast in Canada to provide relief not just from income tax debt but from all debt.

1. A Consumer Proposal – This is the only way that CRA is allowed to agree to an offer of settling for a percentage on the dollar of repayment of income taxes in Canada. A Consumer Proposal must be filed via a Licensed Insolvency Trustee (That’s us!). You, or your accountant, could not contact CRA directly and offer to pay them back fifty percent. Your CRA collector is simply just not authorized to approve that offer. However, when the proposal comes from our office, it jumps over the collection level of CRA and goes to the next department. We regularly file Consumer Proposals that are approved by CRA.

2. File for Bankruptcy Protection – This is another federal option that can be a highly practical way to put up a wall between you and your Canadian taxes. In situations where making a Consumer Proposal is just not practical, a bankruptcy filing is the next go-to option. Once you have completed your duties and received your Certificate of Discharge, you will receive a fresh start with your taxes in Canada.

In this short podcast, Derek Chase talks about the CRA and tax debt. Find out more about the options available to you.

Final Thoughts

Dealing with the Federal Government can be difficult. They are large and you are not. The best way to get relief is to rely on professional help sooner rather than later. It is important to gain a good understanding of what options are available to you.

Please take advantage of our free initial consultation so that you can make the best decision for you and your future. At Chase & Associates, we offer a free consultation, which means we will go through all of the options available to you to deal with your tax debt.

Derek L. Chase, CPA, CA, LIT

Being able to offer debt help assistance to individuals and corporations on a more intimate basis was a driving force in completing a “second CPA” by becoming licensed by the Federal Government as a Licensed Insolvency Trustee (previously Trustee in Bankruptcy) in 1997. It is extremely satisfying to be able to witness lives change for the positive due to a restructuring of financial affairs.