Options for Dealing with Tax Debts
While it may seem like the Canada Revenue Agency (CRA) has all the power if you owe it money, the truth is there are strategies that you can put in place to deal with large tax debts.
If your tax liability is manageable, the CRA will work with you to make periodic payments until your tax debt is repaid. In most cases, it’ll require repayment within one year. In addition to repayment of your actual taxes owing, the CRA generally requires you to repay all penalties and interest. The CRA won’t negotiate a voluntary reduction in the actual taxes owing. However, in extreme hardship cases, it’ll cancel or waive penalties and interest. This may require the involvement of a tax lawyer to assist in the process and you should weigh the costs of legal counsel against any potential savings.
If your tax debts are more than you can repay and you need tax debt relief, you still have legal options to pursue through a Licensed Insolvency Trustee. It’s possible to file a consumer proposal to settle tax debt obligations and most tax debts can be discharged in a personal bankruptcy.
The types of tax liabilities that can be included in a bankruptcy or proposal include personal income tax debts, unpaid HST installments, and income taxes from an unincorporated business. There are, however, some exceptions. If the CRA has already registered a lien on your property for outstanding taxes, your tax debt is now secured against your property like a mortgage. Secured debts are not discharged through an insolvency process and as such these tax debts can’t be dealt with through a proposal or bankruptcy.
When making a consumer proposal that involves tax debts there are also other considerations special to the CRA. First, the CRA will require that all your tax returns have been completed and submitted. This allows the CRA to confirm how much taxes you may owe to submit a claim in the bankruptcy or proposal. It may also require that you commit to keeping all future tax returns and tax payments current as part of the proposal conditions. The CRA may also demand to keep any future refunds pending the completion of your proposal to offset your tax debt and request that you cancel any tax appeal that’s in process.
If you file bankruptcy for tax debts over $200,000 where your tax debts account for 75% or more of your debts, you also won’t be eligible for an automatic discharge and may be bankrupt longer or may be required to make additional bankruptcy payments.
In summary, here are four steps that can help you deal with unpaid taxes:
- File all outstanding tax returns;
- Determine how much you owe;
- Determine if you can afford to repay and make a repayment plan with the CRA if you can;
- If not, contact a Licensed Insolvency Trustee to talk about CRA debt forgiveness rules.
Once you’ve dealt with your old outstanding taxes, be sure to keep up with all future tax installments and payments to avoid having future problems with the Canada Revenue Agency.
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