…and the tax man cometh — dealing with tax, the CRA, debt help and bankruptcy

Every year, without fail, just like snow and temperatures will eventually fall in the winter, mosquitoes will pester us in the summer… every April, the tax man comes. With the deadline for Canadians to pay their personal taxes (by April 30) lets explore the issue of when you OWE money to CRA (Canada Revenue Agency).

Currently we (the trustees at Grant Thornton) are seeing about 50% of our clientele dealing with with some amount of tax debt that is owed to the CRA . While this may seem like a relatively high number, tax debt is not unusual.

One of the major trends we continue to see is people not filing their taxes for fear of owing money – this is not only a mistake, but failing to file your taxes does not get you out of paying the taxes for the year, if you owe, it can actually lead to larger amounts being owed through fines and penalties. We have seen tax debt to the extent where 50% of the amount owed is a build up of fines, interest and penalties over multiple years.

Here are the most common reasons people fall behind on paying (or filing) their taxes:

  • High costs from relationship breakdown – separation or divorce has caused people to incur costs associated with legal bills and support payments, distracting them from focusing on tax filing and remittance requirements
  • Lack of knowledge – this is more common among self-employed people that have been making good money in their respective trade. Often these people may fail to recognize the need to maintain compliance with CRA – they often put aside the matter until it’s too late, or underestimate the amount they need to set aside to pay tax which ends up causing them trouble. Some small business owners simply do not know what is required and have been soo busy working on the profit side of their business, they neglect to care for the compliance side.
  • Procrastination – some people are born procrastinators and just put off dealing with their taxes until they have completely forgotten about them all together. Then one day they are forced to deal with many years of unfiled taxes.

“The biggest mistake we see people make is neglecting to file their taxes year after year, and letting costs build up to insurmountable amounts – frequently, the penalties and interest from either not filing or not paying becomes as much as the tax owing,” says Freida Richer. “People are eventually pushed to resolve their tax debt because of the following reasons:

  • the CRA begins to garnish their wages to a point where they have no choice but to deal with their taxes,
  • the CRA threaten to file writ on the property of their home,
  • they get pressure from family or have a change in their life (birth or marriage) and want to get their finances in order.
  • their is a freeze put on their bank account.

Whatever the motivation, people should know that only a Trustee can help negotiate tax debt with CRA.”

With tax season approaching, now is the time for people to be especially mindful of their taxes and keep in mind that filing them, even if you owe, is still better than neglecting them all together.  CRA is more inclined to work with you if your taxes are filed and up to date than if they find out you have not filed your taxes in years.

On another note, keep your receipts and all tax related documentation for seven (7) years, you never know when/if you will be audited and its much easier to save the information than to try to hunt it down later.

If tax debt has become a challenge that you are ready to deal with, contact one of our trustees where we can review your options. Consumer Proposals allow people to make a fair and reasonable proposal to their creditors, including the CRA, for a revised repayment plan. Often times we are able to consolidate and reduce the overall debt owing and provide and interest-free repayment schedule for up to 60 months.

With multiple locations across Canada, there is sure to be an office near you.

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Forget any potential tax refund, what if you owe money to Canada Revenue Agency?

Are you dreaming of a tax refund? Many of us are ever-optimistic and complete our tax returns (maybe with professional help) hoping a refund might be coming our way—to fund a vacation or, likely the better choice: to pay down credit card debt.

However, you may be one of thousands of Canadians who has not yet paid any personal income tax for the 2012 tax year, and/or owes for previous years (and hopefully has a formalized payment plan in process) or, is an outlier nervously avoiding the reality of several years of unfiled tax returns.

Paying personal income tax regularly – and fully – is often the bane of the self-employed. For entrepreneurs there may be no one tasked with diligently deducting (and remitting) tax, before income or a draw from revenues is taken.

Tax debt cannot be taken lightly. CRA has unique powers to make sure they collect what people owe. Knowing that none of us like to pay taxes they charge penalties and interest on all overdue taxes. It’s a policy designed to keep us on the straight and narrow. If you do get into arrears, CRA can withhold child tax credits and GST credits until the debt is paid. They can take money from your bank account or garnishee your wages without getting a judgment against you. CRA has millions of taxpayers and they are almost always unwilling to accept less than full payment.

I say ‘almost’ because there are situations where some relief from tax debt is available.

If you owe personal income tax and cannot pay the balance in full, you can explain your financial situation to CRA and negotiate a payment plan. For example, if you owe $1,000, you may offer to pay $100 per month for the next ten months. However, even if CRA accepts your offer, you will continue to be charged interest until your debt is paid.

Another option is to make a formal Proposal to CRA. Developed with the help of a professional Bankruptcy Trustee, a Proposal isn’t bankruptcy but rather a means to explore other ways to address a variety of debt problems. Making a Proposal to creditors (banks, stores) is quite common and can be a way to negotiate lower debt amounts and/or expanded repayment schedules.

When making a Proposal to CRA it is not a ‘for-sure’ opportunity to obtain a reduction of your tax debt (and extended payment terms). You must show that your filings are up to date, not fraudulent in your representation and, that prior to your Proposal you have been a taxpayer in good standing. You have to be able to make a case for extreme circumstances hindering your ability to pay the full amount as due—and demonstrate you are truly an honest and unfortunate debtor.

The Proposal will only include taxes owing prior to the Proposal date. Tax returns due during the Proposal period must be filed as required and any tax owing paid as it becomes due. Depending on your situation, payments could be made for up to five years.

The other option to addressing tax debt is bankruptcy. It’s a common misconception that personal income tax debt is not discharged by bankruptcy. This is not true; personal income taxes are covered by bankruptcy and this solution should be discussed fully with a Bankruptcy Trustee to ensure it might be the most viable solution to an individual’s distinct situation.

And, if you haven’t filed your personal tax return for several years, get the tax package and forms for the missing tax years from the CRA. Fill them out and send them in. If there is a balance owing you will have to pay a late filing penalty of a percentage of the tax you owe plus a percentage for every month you are late. You will also be charged interest on the outstanding amount. Check the CRA website for current percentage rates and other implications. There is no escape from CRA and addressing your tax situation will bring you some relief—eventually. Make sure you file regularly in the future and maybe, one day in the not too distant future . . . a tax refund will come your way.