Owing money to the CRA (Canada Revenue Agency) can be stressful. There are many ways you can wind up in tax debt, such as not filing your personal income tax returns, failing to pay taxes on business income, HST payments for the self-employed, or inadequate payroll deductions from your employer if you work multiple jobs.
When you owe the CRA money, they charge penalties and interest on unpaid amounts. There is a late filing penalty of 5% plus 1% of your balance owing each month, and the penalty increases if you repeatedly fail to report income. Once you start owing money, it starts to grow, and there’s no hiding from it.
If you’re afraid that you are going to owe the government money, don’t delay filing your taxes. You will only incur harsher penalties and wind up owing more in the end.
The Canada Revenue Agency can garnish your wages, seize your bank accounts, or even register a lien on your home. Given the broad collection powers available to the agency, the sooner you can act on CRA debt, the better. Fortunately, filing bankruptcy or a consumer proposal can stop CRA collection actions.
A common question we hear at David Sklar & Associates is “does bankruptcy cover tax debt in Canada?” When you declare bankruptcy in Canada, you can include tax debt, but it’s not the only way to fix the problem! A consumer proposal provides debt relief from unsecured creditors and includes debt forgiveness from CRA as well.
What Happens When You File for Bankruptcy?
Filing for bankruptcy will have major repercussions on the rest of your finances. It will discharge you from unsecured debts, which includes credit cards, payday loans, amounts owing to utility companies, student loans under certain circumstances, and tax debt.
The downside is that you will have to sell any non-exempt assets you own to pay off your creditors, as well as 50% of any surplus income over a certain threshold.
Bankruptcy will provide CRA debt relief, but it will come at a cost. Some of the assets that could be liquidated if you declare bankruptcy include:
- Vacation and investment properties that are not your primary residence;
- Secondary vehicles;
- Non-RRSP investments, including TFSAs, as well as RRSP contributions made in the 12 months before filing;
- Jewelry, artwork, collectibles, and other valuables.
In addition to surrendering assets, you will also have to make surplus income payments for 21 months until you are finally discharged from your debts. Surplus income payments are 50% of any net income earned above a certain threshold that depends on the size of your family. It should give you enough to live, but the payments can be considerable depending on your income.
If you owe money to the CRA, bankruptcy will eliminate those debts, but these are all factors to consider. Talk to an insolvency trustee about your options.
Does Bankruptcy Clear Tax Debt in Canada?
When you file for bankruptcy, you enjoy CRA debt relief along with relief from all other unsecured creditors. The common belief that you can’t escape tax debt this way comes from the past. Before 1992, the Canada Revenue Agency was considered a preferred creditor in the Bankruptcy and Insolvency Act, and it could use this status to oppose a debtor’s discharge from income tax debt.
Since 1992, it has been listed as an ordinary unsecured creditor on the same level as any bank, credit card company, or other lenders. CRA debt can now be discharged unopposed.
There are some exceptions to this rule, including those who owe over $200,000 in taxes, and that number represents more than 75% of their proven debts. Otherwise, as a general rule, if you owe Revenue Canada money, insolvency can help.
Consumer Proposals vs. Bankruptcy and CRA Debt
A consumer proposal is a popular alternative to bankruptcy because it provides debt relief from unsecured creditors, including debt forgiveness from CRA. When you file a consumer proposal with a licensed insolvency trustee you are not required to sell any of your assets to repay your debts or pay any surplus income.
To start the consumer proposal process, you will first need to schedule a consultation with a licensed insolvency trustee where you will review your finances. After reviewing your income, expenses, and total debts, the two of you will find a fair amount that you can pay each month to all of your creditors. These payments can last up to five years after which, you will be discharged from all debts covered by the proposal, including CRA debts.
Tax debt in Canada can be included in a consumer proposal and the CRA will often accept less than your full amount owing, though how much they will settle for will depend on the situation. In order to get the CRA to accept your proposal, you will have to file any and all outstanding tax returns. If you want CRA debt relief and 50% or more of your total unsecured debts are owed to the agency, you will have to get them to accept the proposal.
With a consumer proposal, you are making an offer of a reduced sum of money that you owe on your taxes. The CRA, in this case, would need to accept the proposal, and if accepted, once you have completed the proposal, the CRA debt will be forgiven. With any insolvency proceeding, it is important that you’ve filed all of your taxes so that the CRA can properly assess what you owe.
If a consumer proposal is not a viable option for you, then filing for bankruptcy may be your next solution. With this, your trustee would be required to file a pre-bankruptcy tax return and a post-bankruptcy tax return.
Should the pre-bankruptcy filing result in debt owing to the CRA, this would be covered in your bankruptcy. If a post-bankruptcy tax return results in debt owing, you are responsible for paying this amount. The post-bankruptcy filing covers the time period from the first day of your bankruptcy to December 31 of the year of filing.
What Else Can I Do If I Owe the CRA Money?
While CRA debt forgiveness through insolvency will provide the most relief and eliminate a considerable portion of what you owe, there are reasons you may not want to pursue them. Under most circumstances, there is no reason for your employer to know that you have filed for bankruptcy, but if you work in certain professions that require you to have a security clearance, responsibility for an organization’s or client’s finances, or if you work in a bonded profession, you may not be able to file bankruptcy. Bankruptcy and consumer proposals will also both appear on your credit report for several years after you have been discharged, which can make it harder to qualify for another loan down the line.
You also have a debt consolidation option such as a debt consolidation loan, but you should proceed with caution. With a debt consolidation loan, you borrow money in order to pay off other unsecured debts – such as the CRA, for example. Ideally, the new loan offers a lower interest rate than the original, so not only do you make a single monthly payment, but the debt will ultimately be cheaper.
This is where it can become difficult. Sometimes debt consolidation loans offer lower initial interest rates that increase after a year if the balance hasn’t paid off. It can also be harder to negotiate with another lender than the CRA, which offers ways to negotiate payment plans outside of debt relief.
Sometimes debtors will make use of a debt management plan to reduce interest rates on credit card loans and other debts. The Canada Revenue Agency will not usually deal with debt management plan providers, and it’s rare that tax debts would be included in them.
Your CRA Debt Options
If you are having CRA debt issues, speaking with a licensed insolvency trustee to help review your options is the first step. They can see what the best solution is for you, which may include a consumer proposal or a bankruptcy. When successfully entering into either a bankruptcy or a consumer proposal, this stops any further actions against you by the CRA.
If you owe the CRA money, dealing with CRA tax debt should be your top priority. Not only can the agency use widespread collection actions, but it can also withhold GST and Child Tax credits or even remove money from your bank account – leaving you out of luck when it comes to meeting other obligations like mortgage payments.
Don’t delay if you find yourself in tax debt. There is a solution to all types of debt.
If you live in the GTA, book a free consultation with the caring professionals at David Sklar & Associates. We are here to help assist you in making the best decision for you.