Introduction
Many taxpayers find themselves overwhelmed by tax debts, compounded by other financial obligations and increasing interest charges. If you’re struggling to manage your tax debt, it’s important to know that the Canada Revenue Agency (CRA) has extensive collection powers. These powers can be exercised without a court order and may include:
- Garnishing your income
- Freezing your bank accounts
- Holding a third party responsible for your debt (in specific situations)
- Placing a lien on or seizing your assets
Fortunately, there are options to reduce your tax debt to a manageable level. This article outlines potential relief options and how taxpayers can address their CRA obligations.
Consumer Proposals
A consumer proposal is a debt relief option under the Bankruptcy and Insolvency Act that can reduce unsecured debt by up to 80%. Unsecured debt is any debt that doesn’t have an asset tied to it as collateral. To be eligible for a consumer proposal, your total debt (excluding a mortgage on your primary residence) must be under $250,000.
When you file a consumer proposal, collection actions from creditors immediately stop, and no further interest accrues on the included debts. A Licensed Insolvency Trustee (LIT) will work with you to create a proposal that fits your financial situation. Creditors must approve the proposal, and once they do, you’ll make regular payments to the trustee.
You’ll also need to attend two financial counseling sessions on budgeting and financial planning. Unlike bankruptcy, a consumer proposal does not severely impact your credit rating. However, defaulting on the agreed payments will automatically lead to bankruptcy.
Taxpayer Relief Program
The Taxpayer Relief Program (formerly called the Fairness Application) helps those facing undue hardship due to their tax debts. The CRA applies high interest rates to outstanding debts, making them difficult to manage. Qualifying for taxpayer relief is more challenging than a consumer proposal and is only granted in specific situations.
Here are the four categories where taxpayer relief may apply:
- Extraordinary Circumstances:
- Natural disasters (e.g., floods, fires)
- Civil disturbances
- Serious illness or incapacity
- Severe emotional or mental distress
- CRA Errors or Delays:
If CRA delays or mistakes prevented you from filing on time or led to excessive penalties and interest, you may qualify for relief. - Financial Hardship:
If paying the debt would make it difficult to afford basic necessities like food, housing, or medical care, you may be eligible. In many cases, interest comprises a significant portion of the debt. - Other Circumstances:
The CRA may grant relief for situations not covered above, though this is discretionary and less predictable.
Dealing with CRA Collection Methods
CRA collection methods can significantly disrupt your financial stability. However, if you show that you’re making efforts to repay your debt, the CRA may ease some of its sanctions, such as lifting income garnishments or unfreezing bank accounts.
If you face aggressive enforcement actions, consulting an accountant can help you explore solutions and negotiate with the CRA.
Pro Tax Tip: Act Sooner Rather Than Later
Tax debt is easier to manage when addressed promptly. No matter how high the penalties and interest, there are options to resolve your tax debt and move forward. An accountant can work with you and CRA collection officers to arrange payment plans and potentially suspend sanctions.
Frequently Asked Questions (FAQ)
Can I dispute a tax debt or the CRA's actions?
Yes. If you believe your tax debt is incorrect or disagree with CRA actions, you can file a Notice of Objection within 90 days of the assessment. If 90 days have passed, you may request an extension within one year. The CRA will decide whether to grant the extension.
The CRA is threatening action, but I can’t pay. What should I do?
If you receive collection letters and cannot pay, contact a qualified accountant immediately. CRA collection officers may use aggressive tactics to prompt payment. An accountant can help negotiate with the CRA to relieve sanctions and set up a payment plan.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.
Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.
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