David Rotfleisch on What Help is Available for Taxpayers Who Owe Debt to CRA: 4 Specific Situations for Relief

Introduction: The CRA Possesses a Range of Powers to Enforce Tax Debt Collection

Many taxpayers face overwhelming tax debts in addition to other financial obligations, with no apparent way to manage the increasing tax debt as interest continues to accumulate. As tax debts grow, the CRA intensifies its collection efforts, utilizing a range of aggressive methods. The CRA’s broad collection powers, which do not require a court order, include:

• Garnishing of income
• Freezing bank accounts
• Holding third parties responsible for payment in certain cases
• Placing liens on or seizing assets

The good news is that there are options available to help taxpayers reduce their outstanding balance to a more manageable amount, easing the burden of tax debt.

Debt Relief Through Consumer Proposals

A consumer proposal, governed by the Bankruptcy and Insolvency Act, is a debt relief option that can reduce unsecured debt by up to 80%. Unsecured debt refers to obligations that aren’t backed by collateral, such as credit cards or personal loans. To be eligible, an individual’s total debt must be less than $250,000, excluding the mortgage on a primary residence. Once filed, a consumer proposal puts an immediate stop to legal collection efforts by creditors, preventing them from pursuing or continuing to collect on unsecured debts. Additionally, interest on these debts ceases to accumulate.

A Licensed Insolvency Trustee will collaborate with the taxpayer to assess his or her financial situation and develop a consumer proposal tailored to the taxpayer’s needs. For the proposal to take effect, it must first be accepted by the creditors. Once approved, the individual makes the agreed-upon payments to the Trustee for the duration of the proposal. Additionally, the taxpayer is required to attend two financial counseling sessions, which focus on budgeting and setting financial goals. A key benefit of a consumer proposal is that it helps avoid bankruptcy, which has a more significant negative impact on credit. However, it’s essential to keep up with the payments, as failing to do so will result in automatic bankruptcy.

Reducing Tax Debt Through Taxpayer Relief Program

The taxpayer relief program (formerly known as the Fairness Application) under the Income Tax Act is designed to help individuals facing significant hardship due to their tax debts. With the high interest on their tax debts imposed by the CRA causing amounts to quickly become unmanageable, it is important to note that qualifying for this relief is more difficult compared to a consumer proposal. Relief is typically granted only in cases that clearly fall within specific criteria.

The taxpayer relief program may be available in four key situations, including:

1.    Extraordinary Circumstances

This includes events beyond the taxpayer’s control such as natural disasters, civil disturbances, serious illness or incapacity, and significant emotional or mental distress.

2.    CRA Actions

This category covers situations where delays or errors by the CRA prevented taxpayers from filing their returns correctly or on time, or resulted in excessive penalties and interest.

3.    Financial Hardship

This applies when paying the debt would lead to severe financial difficulties, making it impossible for the taxpayer to afford essential needs like food, clothing, housing, medical care, and transportation. Often, a significant portion of the debt may be attributed to interest.

4.    Other Situations

The CRA may consider granting relief under circumstances that do not fall into the specified categories. This category is discretionary, and it can be challenging to determine if relief will be granted.

Tax debts can create serious disruptions due to the CRA’s stringent collection methods. However, if a taxpayer demonstrates a genuine effort to address their debt, the CRA may be willing to lift certain severe measures, like freezing bank accounts or garnishing wages. If the CRA’s actions have caused significant disruption in your life, contact our expert Canadian tax lawyers to explore potential solutions.

Tax Pro Tip: The CRA can pursue aggressive enforcement measures. Act before the situation becomes unmanageable.

Addressing tax debt sooner rather than later is crucial, even if penalties and interest have accumulated substantially. Numerous options exist for settling these debts and moving forward. A Canadian tax lawyer can work with you and CRA collections officers to potentially pause sanctions and explore available payment plans.

Frequently Asked Questions (FAQs)

Can I challenge a tax debt or the CRA’s actions?

Yes, if you think the debt amount is inaccurate or disagree with the CRA’s actions, you can file a notice of objection. This must be done within 90 days of receiving the assessment, or within one year of the 90 days if you include a request for an extension. The CRA will decide whether to grant the extension request.

The CRA is threatening specific actions if I don’t make a payment, but I’m incapable of paying at the moment. What are my options?

If you’re receiving threats from the CRA and are unable to pay, it’s crucial to contact an experienced Canadian tax law firm right away. Discussing your options early can prevent further interest from accruing. Collection officers sometimes make threats that exceed their legal powers as a strategy to force payment. A Canadian tax lawyer can negotiate with the CRA to possibly reduce or delay some of the sanctions, allowing you to get back to a normal life while arranging a feasible payment plan.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”