Few debts create as much anxiety as money owed to the Canada Revenue Agency – and for good reason. Unlike a bank or credit card company, CRA has collection powers that are considerably broader than most unsecured creditors. People are often horrified to discover, when on the receiving end, that CRA can garnish wages, freeze bank accounts, register liens against property, and intercept tax refunds without following the same court process required of other creditors.
That is why the financial balance in life can rapidly become chaotic when tax debt begins to grow. They are not only worried about the amount they owe. They are worried about what CRA may do next.
Tax debt is not only from not remitting returns and payments. Tax debt can also arise when CRA re-assesses you for a tax year you already thought was finalized. For income taxes, CRA can go back 3 years since the previous assessment (or even further back in special circumstances). This is to say, the tax debt can come as an unwelcome and unexpected surprise.
A common questions Licensed Insolvency Trustees receive is whether CRA will negotiate a reduction of the principal amount owing.
Outside of a formal insolvency proceeding, CRA generally expects to collect the full amount of tax owing (including all interest and penalties) and usually within a very short timeframe and only after you have provided a significant amount of personal financial data.
Why CRA is different from other creditors? Why does CRA have superpowers to collect?
Most lenders make a conscious decision to extend credit. They review applications, assess credit histories, and decide whether they are willing to take the risk of lending money.
CRA is different.
Tax debt arises because of legislation, not because CRA decided to lend money. For that reason, Parliament has granted CRA collection powers that go beyond those available to most unsecured creditors.
Depending on the circumstances, CRA may:
- Garnish your wages.
- Freeze and seize money in your bank account.
- Register liens against your property.
- Intercept tax refunds or government payments.
- Assert deemed trust claims against property (real and movable) that you own.
- Take legal action (even, in certain circumstances against others) to collect unpaid taxes.
For someone already under financial pressure, these collection powers can quickly turn an already difficult situation into a crisis.
Direct Payment arrangements with CRA have limits
Many taxpayers assume they only need to call CRA and arrange monthly payments.
Sometimes that works.
If your financial situation allows you to repay the debt within what CRA determine is a reasonable period, CRA may agree to a payment arrangement. However, it is important to understand what that arrangement actually accomplishes.
A payment arrangement seldom reduces the amount of tax owing.
It also does not eliminate interest, which often continues to accumulate while the debt is being repaid. Currently (it changes quarterly), the interest rate charged by CRA on income tax debt is set at 7% (which is compounded daily).
For relatively small debts, that may not create a significant problem. For larger tax liabilities, however, interest can continue growing while payments make only limited progress toward reducing the principal balance.
If you want to have CRA reduce the interest or penalties, this involves a Taxpayer Relief Program application – which often requires a tax lawyer or CPA (certified chartered accountant) to apply on your behalf.
Why refinancing often fails
Some taxpayers attempt to solve CRA debt by refinancing their home, increasing a line of credit, or taking out a personal loan.
In certain situations, refinancing may provide enough cash to pay CRA in full.
The difficulty is that refinancing replaces tax debt with another form of debt. The monthly payment may change, but the obligation itself remains. If, for example, you obtain a private second mortgage to pay off CRA your interest rate may go from 7% to as high as 15% to 20% depending on the lender and the equity in your home. Speak to a mortgage professional to see what your rate will be and what will happen when the mortgage matures in the usual one-year time.
Before replacing the CRA debt with another debt, consider your ability to manage this new debt on top of other debt you may already be carrying. A good place to review that is with a Licensed Insolvency Trustee (we further explain why below).
Refinancing is not always the solution people hope it will be.
The only way to reduce the principal CRA debt
Many people are unaware that there is only one umbrella that allows CRA to accept that the principal amount of CRA debt be reduced.
CRA (unlike in the USA where tax debt is almost never forgivable) allows honest but unfortunate taxpayers to be protected from the CRA debt under Federal law. The Bankruptcy and Insolvency Act provides taxpayers with two basic options: protection by bankruptcy or by a proposal. Below we are referring to a specific type of proposal called a consumer proposal (there is also another type of proposal for larger tax debts but that is beyond the scope of this article).
A Canadian consumer proposal is a legally binding settlement administered by a Licensed Insolvency Trustee. Through the proposal process, unsecured creditors, including CRA, are asked to accept repayment of less than the full amount owed. If 50% + $1 (by value of debt) of the creditors accept the proposal and no-one requests a court review, the proposal is fully binding on all your creditors – including CRA – (even those creditors who voted against accepting the proposal).
This is fundamentally different from a direct payment arrangement with CRA.
For many Canadians carrying tax debt, this represents the first realistic opportunity to eliminate the debt rather than simply manage it.
What happens after a consumer proposal is filed?
One of the biggest advantages of filing a consumer proposal is the immediate legal protection it provides.
Once the proposal is filed:
- Most CRA collection action stops.
- Wage garnishments are generally halted.
- Bank account seizures are stopped.
- Collection calls end.
- Interest stops on the unsecured debts (including the CRA debt) included in the proposal.
- Usually only one affordable monthly payment replaces multiple creditor monthly payments.
These protections allow people to focus on rebuilding their finances instead of constantly reacting to collection activity.
Timing matters. Taking action before CRA has completed enforcement often provides the greatest opportunity to regain control of the situation.
Why will CRA accept my Consumer Proposal and how much must I offer?
CRA will generally accept an offer that provides the creditors with more than what they would receive in a bankruptcy with the caveat that the offer justifies the creditors keeping the file open for up to 5 years – in other words, the percentage of the debt offered must be a reasonable portion of the total debt owed. While there can be special circumstances that can reduce the portion offered to less than one third, generally speaking one third to one half is acceptable. It is not practical to describe in any formula or article how this is calculated. It is therefore best to meet with a Licensed Insolvency trustee and ask them to explain based on the full details of your particular fact situation.
Why you should speak with a Licensed Insolvency Trustee first
When people search online for help with tax debt, they often find debt consultants or debt advisors advertising sometimes exaggerated solutions.
What is not always obvious is that these businesses operate in an unregulated marketplace and they are generally not licensed or regulated professionals. Some charge significant upfront fees before referring clients to the only professionals legally licensed to administer bankruptcies and consumer proposals – the Licensed Insolvency Trustee.
Licensed Insolvency Trustees are different.
Licensed Insolvency Trustees are federally licensed and regulated professionals with years of focussed education and practical experience before they are licensed. They are the only people authorized to administer consumer proposals and Canadian bankruptcy, and they are legally required to explain all available options based on your circumstances.
Perhaps most importantly, initial consultations with a Licensed Insolvency Trustee are free.
That means you can receive professional advice before making any decisions about refinancing, borrowing more money, or attempting to negotiate directly with CRA.
Don’t wait for CRA to make the next move
One of the biggest mistakes taxpayers make is waiting too long.
They hope their financial situation will improve. They expect a better year in business, a bonus at work, or the sale of an asset to solve the problem. While those things certainly happen, CRA collection action often continues while people are waiting for circumstances to change.
By the time wages have been garnished or bank accounts have been frozen or a lien has been placed against your house or vehicle, many people wish they had sought advice sooner.
Understanding your options early gives you more choices and often leads to a better outcome.
Speak with Baigel Corp.
If you owe CRA more than you can realistically repay, you do not have to navigate the situation alone.
Baigel Corp.’s www.baigel.ca federally licensed and regulated Licensed Insolvency Trustees provide confidential, no-charge consultations and will explain all available options based on your circumstances. If a Canadian consumer proposal is appropriate, we can explain how it works, what protections it provides, and whether it can help reduce your CRA debt. If Canadian bankruptcy is the more appropriate solution, we will explain that as well.
The sooner you understand your options, the sooner you can begin moving toward a permanent solution instead of continuing to live under the pressure of growing tax debt.
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee