Don Allen - Bankruptcy Trustee & Receiver
Trustee & Receiver
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Canada Revenue Agency

The mandate of the Canada Revenue Agency (CRA) is to assess and collect the correct amount of tax for individuals and businesses in Canada.

CRA can freeze your bank account or garnishee your wages a lot easier and faster than other creditors.  If you have a business and the CRA knows who your major customers are, they can send a notice to those customers directing them to pay to them (to CRA, not you) the money your customers were to pay to you for the work you have done.

If you have a house, the CRA can register a lien against the property. No consent is required by you. No court order is required. Think of it as a second mortgage where the tax man is dictating the repayment terms.

Obviously, the best way to avoid these consequences is to pay the debt. Just like any creditor, the CRA has collectors with whom you can negotiate a payment plan. However, the CRA is typically unwilling to accept less than the full amount owing.

So, what do you do if a repayment plan just isn’t realistic?  The general rule is that CRA gets treated the same as any other creditor if you file for personal bankruptcy.

The goal in bankruptcy is not to file for bankruptcy, the goal is to be discharged from bankruptcy. It is not until you are discharged, that the debts are legally released. In most situations, as long as you fulfill various financial and non-financial duties, you are eligible to receive your discharge without a requirement to go to court. This is called an automatic order of discharge and is granted by the Trustee.

You are not eligible for an automatic discharge if your personal tax debts are greater than $200,000 and represent more than 75% of your total unsecured debts. That means going to court and having a judge (called a registrar in bankruptcy court) deciding what conditions you have to meet to be discharged. It could involve paying back a portion of the debt. It could mean a time delay before you can be discharged. It could mean that the Registrar refuses to grant a discharge altogether, but that would be in extraordinary circumstances.

If CRA has registered a lien against your house, that makes the taxes owed a secured debt. If this has happened and you want to keep your house, you should be talking to the CRA about payment arrangements. Filing for personal bankruptcy will not remove the lien.

If you have a business, your debts with the CRA might not be limited to income taxes. You might also have debts for unremitted GST/HST or payroll deductions. These are debts that are included in bankruptcy, but there are factors that need to be considered and we would be glad to go over your circumstances in detail.

If you owe CRA and cannot pay the balance of taxes in full, it is possible to negotiate with them in regards to payment terms.

Contact your nearest CRA office and explain your circumstances and negotiate a tax payment plan.  Whatever deal CRA agrees to, you will continue to be charged penalties and interest until your debt is paid in full.

If you cannot reach an agreement with CRA, they have the power to withhold child tax credits and GST credits until your debt is paid. They also have the power to garnishee your wages and take funds from your bank account, so treat this debt seriously.

As a general rule, CRA will not accept less than the full amount owing. If they allow you to pay less than the full amount owing, they may be forced to make the same deal with everyone else.

However, there is a way to negotiate with CRA to make a deal for less than the full amount owing to them.

CRA wants to ensure that all of your assets are disclosed, and that all debts are being treated equally. The only way they can ensure this is by requiring you to file a formal proposal to CRA.

In order for your proposal to CRA to be accepted, it must contain the following terms:

  • The proposal must offer to pay more to the creditors than would be available in a bankruptcy.
  • All tax returns must be filed and up to date prior to the acceptance of the proposal.
  • All tax returns due during the proposal period must be filed when due.
  • All taxes owing during the proposal period must be paid as they become due. (The consumer proposal will only pertain to taxes owing prior to the proposal date).
  • In the event that taxes for prior years are re-assessed and a refund is due, that refund must first be applied to CRA's outstanding indebtedness.

In certain circumstances, CRA may require additional terms in a proposal.  Contact us to discuss this further.

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