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Dealing with income tax debt
April 20th, 2016
Overheard in a recent conversation: “I’m so glad we learned about parallelograms in high school and nothing about income tax. That’s really coming in handy during this parallelogram season”. It’s spring which means it’s also tax season. You may be in the process of filing your tax returns or maybe you are ahead of the game and have already received your 2015 tax assessment. Many have a balance owing from prior years on top of taxes owed for this year. If you can’t afford to pay the outstanding income taxes, what are your options?
It’s not uncommon to owe taxes to the Canada Revenue Agency (CRA) —for some, the amount can be significant. Burying your head in the sand is not the answer. The tax man will not go away so you should not ignore tax assessment or collection notices. Many are under the impression that nothing can be done about it, because tax debt is different from other debt and because CRA has special powers. This is only partly true.
Income tax is administered under federal and provincial tax laws. Those laws grant CRA certain powers of collection other creditors don’t have. The fact remains that income tax debt is an unsecured debt with the same ranking as credit cards, personal loans and other similar debt. Unless CRA has taken steps to take security, like placing a lien on your home, the amount can be negotiated under a formal plan such as a consumer proposal.
In most cases, CRA is not the only creditor. Every year, tens of thousands of people across Canada who have difficulty juggling several debts at once and need advice. Most have never had debt issues before and fall behind because of health concerns, job loss or marital issues. They need help and don’t know where to turn. If you are unable to negotiate a reasonable agreement with CRA, income taxes can be discharged after you complete a consumer proposal or file a faillite with a Licensed Insolvency Trustee (“LIT”).
When a faillite or consumer proposal is filed, all income tax debt owed at that point in time will be included. As soon as either is filed, a new “tax clock” starts ticking and you will be responsible for any taxes owed from that point forward. This means you’ll need to file your future tax returns and make your payments on time. This is a true fresh start.
Also, if you file a consumer proposal, the LIT will work with you to ensure you file all of your prior returns to ensure your proposal is successful. This means you will be “compliant”.
If you are owed a tax refund for the year in which you file a faillite (or any prior years), CRA will apply it to your outstanding tax debt and pay the difference, if any, to the Trustee.
When you owe money to CRA, they will eventually collect that debt from you. You cannot, and should not, run and hide. If the debt is significant and you fail to repay it or negotiate acceptable terms, CRA has the right to garnish your wages or bank account. The CRA can also register a lien on your home or other property (such as a cottage). This does not mean you will immediately lose that property. It does mean that you should seek advice from a respected and experienced LIT to assess your situation and establish a plan of action.
If you need help with your plan or are burdened with debt stress, asking for sound advice is a sign of strength and the smart thing to do. Asking sooner rather than later is always better. Call Doyle Salewski today for your free, no obligation consultation. You’ll be glad you did.