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How to Deal with Tax Debt
August 27th, 2019 by Janet Doyle
If you’re feeling overwhelmed by outstanding tax debts, you aren’t alone. In 2018, Canadians owed $43.8 billion in outstanding tax debt to the Canada Revenue Agency. The CRA has been working hard to collect the debt from Canadians, and the CRA’S ability to seize bank accounts, garnish wages, and put liens on property without going through the courts means many consumers are putting themselves at risk.
The good news is that there are options to deal with tax debt; including legal arrangements that will stop garnishments and eliminate tax debt by up to 70%.
Tax Debt Is Common
The Fraser Institute reports that Canadians pay significantly higher personal income taxes than Americans, a result of increases over the last 10 years. In 2017 Canada had the 7th highest combined tax rate at 53.53%! Because taxes can be so confusing, tax debt is common, and many times can come as a surprise especially if there has been mishandling of finances in circumstances such as:
- Self employment or multiple employers
- Owing taxes on RRSP Withdrawals
- Insufficient tax deductions on income
- Errors or omissions on tax returns
- Result of a reassessment
- Overpayment of benefits
Over the last 10 years there have been many scams targeting Canadians with fraudulent organizations contacting Canadians and threatening legal action in an attempt to scare victims into paying a fake debt. The real CRA will communicate with you via their secure site available by your unique login only, and if the debt is real, they can also send you a letter in the mail to confirm the debt and the CRA only accepts payment by cheque, online or at the bank.
CRA Collections Can Take Your Money & Home – Without Going to Court!
The CRA is given special powers the Canadian Income Tax Act, allowing them to collect on outstanding debt by freezing your bank account, taking up to 50% of your paycheque, or place a lien on your property. Unlike other creditors, CRA does not need to move the process through the courts so garnishments and liens can happen very quickly and take many people by surprise. The CRA can send a Requirement to Pay to your bank, legally forcing the bank to pay the CRA out of funds in your account. For those that are self-employed, the CRA can contact any clients with a legal order to send any outstanding fees to the CRA for payment, taking up to 100% of your income. Old age security, and disability pensions can also be garnished.
Once garnishment action has been taken by the CRA, it can take some time to reverse. While the debtor may have received notices, many are unprepared for the actions of the CRA and are thrown into financial chaos. Losing income often means an inability to pay for daily expenses and bills and cause embarrassment and shame, and most people become unsure and fearful of where to turn next – but the next steps are crucial to creating a debt free future.
For anyone owning a property, the CRA can file a lien meaning once the property has been sold the tax debt, including accumulated penalties and interest, must be paid from the proceeds (like having a second mortgage.) In most cases you will not lose your home immediately and the CRA will wait until the home is sold; but they do have the power to sell your home through a Writ of Seizure and Sale. If your home is jointly owned, the CRA cannot seize the equity held by anyone other than the debtor. If the CRA has filed a property lien, the debt will become secured and must be paid.
Whatever stage of CRA collections you are in, you can take steps to regain control of your finances by eliminating your tax debt completely or other amounts outstanding to other creditors to provide relief from overwhelming debt payments.
1. Act Quickly for Best Results
It’s in your best interest to act sooner than later to avoid paying more money to CRA in interest and penalties and avoid any liens, garnishments, or other actions from the CRA. If your bank account has been frozen, your wages are being garnished, or the CRA has given you a notice of a lien or put a lien on property, you should contact a Licensed Insolvency Trustee immediately to learn about your best legal options. Aside from paying the outstanding debt, the only way you can stop a wage garnishment or unfreeze bank accounts is to work with a LIT, who can begin to reverse the CRA’s legal proceedings immediately. Start by contacting the CRA collections officer, explaining that you are working on a payment plan and collecting all documentation and communication.
2. Hold Money in a Joint Account
The CRA can only seize a bank account in your name; therefore, any joint accounts are usually safe. If you are receiving collection notices from the CRA or already have had your bank account seized, put any cash you have in a joint account to ensure that it is safe from seizure while you figure out your next steps. If you already have had you bank account seized, open a new bank account.
3. File Your Taxes ASAP
If your taxes haven’t been filed; do so immediately to avoid adding penalty charges to the amount owing. The CRA adds penalty fees for late tax filings to your debt; 5% of your balance owing for the current tax year, plus 1% of your balance owing for each full month your return is late, to maximum of 12 months. If you filed late in previous year, the added penalty for missing the deadline this year could be as high as 10% of your debt, plus an added 2% for every month your return is late to a maximum of 20 months.
4. Review Your Assessment
Review your assessment for any changes to your deductions. If you disagree with their decision on a deduction you believe you are eligible for, you can file an objection with an appeals officer.
5. Arrange an Affordable Payment Plan
If you haven’t filed or paid your taxes, chances are you could be faced with a large bill that you weren’t expecting and don’t have the money for. CRA is willing to work with you to set up a payment plan; sometimes with the opportunity to negotiate less or no interest charges. Sometimes CRA will try to get you to agree to a payment plan that won’t work for your budget, so ensure that it’s a plan you can afford before agreeing to it. It’s important to evaluate the effect of compounded interest and penalties and calculate the long-term effects on your financial health.
If you’re asking for relief from interest and penalties, you’ll need to show that paying the additional fees will limit your ability to meet basic household needs and you do not have the money to pay (ie: You cannot reduce expenses, borrow money etc). In our experience, the CRA does not waive fees unless the debtor can show extreme hardship due to health issues, emergency, or similar causes.
6. Get Legal Advice
If your tax debt is overwhelming, you have overdue notices, collection calls, garnishments, account seizures, liens, or notices of any of the above, you should act quickly. You may think it’s time to to hire a tax lawyer; but if you cannot pay the debt back you will spend money on lawyer fees that will add to your financial burden. If you are unable to come to an affordable arrangement with the CRA on your own, there are options to reduce the debt with the help of Doyle Salewski. We will help you calculate the total amount of debt you will pay, plus accruing interest and penalties, how long it will take to pay the debt back, and help you see how the payment plan fits with your budget and future goals.
Doyle Salewski offers a free consultation that includes the services of our in-house trained tax collection specialist who worked for the CRA for 30+ years before deciding to join the Doyle Salewski team. By working with Doyle Salewski, you will benefit from the knowledge of our financial expertise as well as the knowledge of CRA operations, providing you with thorough understanding of all your options and allowing you to make the best decision for your future.
If you have a large outstanding tax debt, are receiving notices and in CRA collections, or your other debts are becoming unmanageable due to CRA payments, call Doyle Salewski for a free consolation and learn your legal options including protection from CRA collection actions and how to eliminate your tax debt in 5 years or less. Doyle Salewski offers a free consultation at one of our office locations or by video conferencing if you would prefer to speak 1-on-1 from the convenience of your own home. Call 613-237-5555 or email [email protected] to book your appointment and receive a customized plan for your debt free future.