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What Are My Options When Dealing With Income Tax Debt?

Life happens. Debt happens. And tax debt happens to thousands of Canadians every year. A large number of the people who contact us owe money to the Canada Revenue Agency (CRA). Within that group of people are regular taxpayers, pensioners, families, small business owners and many others. Tax debt can happen for a variety of reasons. In Canada, most employers will automatically deduct taxes from what you make, which reduces the likelihood of owing the CRA an astronomical amount of money. Where most people run into problems with tax debt is multiple sources of income and self-employment. Even pensioners can owe the CRA if they have a pension coming from more than one source. Those who are self-employed are the most likely to run into problems with owing more in taxes than they can afford to repay.

Any person with tax debt should consult a Licensed Insolvency Trustee (LIT) to explore their options. While debt consultants and lawyers can be expensive, a consultation with a LIT who actually specializes in debt resolution is free. It is also worth noting that if you are hoping for tax debt relief, LITs offer the only form of debt resolution the CRA will accept. Want to know what the best options are for tax debt relief? In this article, we explain the top choices to help you make the right choice. In some cases, it may be possible to make a direct agreement with the CRA to pay the balance over the course of one year. Most cases are more complex and getting the advice of an expert could save you thousands of dollars. At Goth & Company, we want you to know your options and feel confident you are making the right decision about your finances.

Canada’s top options for tax debt

Licensed Insolvency Trustees have the most comprehensive resources for handling debts. They are also the only professionals with the ability to file a consumer proposal – the only form of debt relief accepted by the Canada Revenue Agency (other than a bankruptcy). A proposal offers an alternative to bankruptcy that allows you to retain your assets and repay your CRA debt for most often, less than what you owe. Consumer proposals are one of the top tax debt relief choices for many Canadians. Keep in mind that debt solutions are never one-size-fits-all. In some cases, bankruptcy may be the preferred option to clear money owed quickly and begin over. A LIT will lessen the guesswork by reviewing your budget and eligibility. Outside of direct and immediate repayment, the CRA only accepts the following types of debt resolution:

Consumer Proposals

This is the only option for repaying your tax debts for less than you owe to the CRA. This type of proposal will include all taxes you owe up to the day you file plus any other outstanding debts you may have. Keep in mind that any taxes you owe after the day you file are not included. CRA proposals must be administered by a LIT who will work with you to create a reasonable offer that is within your budget. Your proposal will be accepted or rejected based on a majority vote amongst creditors. The majority is based on dollar value, which means that if you owe $35,000 on your credit card and $15,000 to the CRA, the credit card company will have the deciding vote. What is so great about consumer proposals is that they are legally binding on all creditors. And, because LITs know the ropes when it comes to dealing with creditors and proposals, currently over 98% of our proposals are accepted.

Personal Bankruptcy

Personal bankruptcy offers an alternative for those who do are not eligible for a consumer proposal. By surrendering your assets as repayment, you are able to start over much more quickly. While the term for a consumer proposal can extend up to 5 years, bankruptcy can eliminate your debts as soon as 9 months (for a first-time bankrupt and subject to income guidelines).

Obtaining CRA Debt Forgiveness

In order to obtain debt forgiveness through a consumer proposal, you must provide a comprehensive and complete list of all your assets with the assistance of a trustee. While dozens of credit counselling agencies will offer various types of ‘debt settlement’ these are generally not accepted by the CRA. At Goth & Company, we know how challenging and costly it can be to deal with tax debts. We are dedicated to helping you get back on track, and as such your first appointment with us will always be free of charge. Having a LIT can make all the difference and offer hope for your financial future.

Once a consumer proposal has been filed, the CRA will almost always consider the following details about your financial situation:

  • Do you have a poor record of tax compliance?
  • Have you previously filed a bankruptcy or consumer proposal where tax debt was a significant portion?
  • Do you have other debts?
  • Would you be able to afford the offered monthly payment?
  • Would the CRA receive less money if you declared bankruptcy?

If you appear to be sincere about your desire to repay a portion of what you owe, the CRA is often more willing to vote in favour of your proposal. We see all kinds of reasons why people have found themselves with tax debt. The more information your LIT has the better case they can build for the CRA.

What about bankruptcy?

Consumer proposals are not necessarily the best option for all cases. If you are looking for fast-acting relief from tax debts, bankruptcy might offer the best method to start over. There are a number of things to bear in mind when considering bankruptcy. For instance, a court hearing is required if you owe $200,000 or more for personal income taxes. In these situations, it is common for CRA to request additional duties (such as additional payments or time in bankruptcy) for the bankruptcy to be completed.

CRA Collections

If you are not paying your tax debts, the CRA can act fast and see to it that your bank account is suspended and/or wages are garnished. Any other lender must request a court order before collection action can begin. This process can take months, during which time you will receive notice. The CRA, on the other hand, only needs a signature from taxation authorities to start an immediate collection. If you are self-employed, the CRA will inform your contracts that all future payments must be sent directly to the agency until further notice.

You may have received collection calls from lenders before without experiencing any further action. Do not let this experience deceive you. Canada Revenue Agency can and will strike suddenly. Never ignore tax debt. Doing so could cause a lot of stress and headaches that could have been avoided by acting proactively.

Tax Liens

Be aware that tax liens against your property may not be fully released after bankruptcy and a consumer proposal. When you owe the CRA, they can choose to put a lien against your home. We recommend discussing the possibility of existing liens with your LIT before declaring bankruptcy of a consumer proposal. LITs have the ability to find out if a lien has been placed and the amount. If you do not have an existing lien, the moment you declare bankruptcy or file a consumer proposal, the CRA is no longer able to place a lien on your property.


Get out of debt!

You can always rely on our Licensed Insolvency Trustees and professional team to get your questions answered. Our Licensed Insolvency Trustees are ready to help you. Call us today! 1-780-435-5110