Dealing with income tax debt

May 1, 2017

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Question:  It’s spring across Canada which also means it’s tax season.  A deep “sigh” may be your initial response.  You may be in the process of filing your tax returns or you may have already filed and received your 2016 tax assessment and refund.  You are ahead of the curve, good start!  Many have a balance owing from prior years and now have taxes owed for this year. If you can’t afford to pay the outstanding income taxes, read on to find out what your options are.

Dealing with income tax debt

It’s not uncommon for taxpayers to carry a balance with the Canada Revenue Agency (CRA) – for some, the amount can be significant.   Burying your head in the sand is not the answer.  The tax man will not go away so you should not ignore tax assessments or collection notices.  Many are under the impression that nothing can be done about it, because tax debt is different from other debt and because CRA has special powers. This is only partly true.

Income tax is administered under federal and provincial tax laws. Those laws grant CRA certain powers of collection other creditors don’t have.  The fact remains that income tax debt is an unsecured debt with the same ranking as credit cards, personal loans and other similar debt.  Unless CRA has taken steps to take security, like placing a lien on your home, payment of your income taxes can be negotiated and reduced under a formal plan such as a consumer proposal.  Many are surprised to find out that income tax arrears can be discharged if a bankruptcy is filed.

When you owe money to CRA, they will eventually collect that debt from you. You cannot, and should not, run and hide.  If the debt is significant and you fail to repay it or negotiate acceptable terms, CRA has the right to garnish your wages or bank account. The CRA can also register a lien on your home or other property (such as a cottage). This does not mean you will immediately lose that property.  It does mean that you should seek advice from a respected and experienced Licensed Insolvency Trustee (“LIT”) to assess your situation and establish a plan of action.

In most cases, CRA is not the only creditor. You may have read reports that hundreds of thousands of Canadians have difficulty juggling several debts at once and need advice.   Most have never had debt issues before and do not know what to do once they fall behind. They may be vulnerable due to health concerns, job loss or marital issues.  They need help and don’t know where to turn.  If you or someone you know are unable to negotiate a reasonable agreement with CRA, it’s time to ask for professional help. A first consultation with an LIT is free and an excellent person to ask for advice.

If you are owed a tax refund for the year in which you file a bankruptcy (or any prior years), CRA will apply it to your outstanding tax debt and pay the difference, if any, to the Trustee.

When a bankruptcy or consumer proposal is filed for you by an LIT, all income tax debt owed at that point in time will be included. The CRA debt will be reduced to the same level as all other creditors under the consumer proposal. The amount offered to creditors will be determined by you and your LIT and customized to fit your budget, family obligations and other circumstances.

A new “tax clock” starts ticking when you file and you will be responsible for any taxes owed from that point forward. The LIT will counsel you to file your future tax returns and balance your budget so that payments are made on time. A true fresh start.

Also, if you file a consumer proposal, the LIT will work with you to ensure you file all prior year tax returns to ensure your proposal is successful.  This means you will be “compliant” in CRA’s eyes which will relieve the pressure and debt stress.

If you need help with your plan or are burdened with debt stress, asking for sound advice is a sign of strength and the smart thing to do.  Asking sooner rather than later is always better.  Call Doyle Salewski today for your free, no obligation consultation. You’ll be glad you did.

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