No one wants to be indebted to the Canada Revenue Agency (CRA). However, every year thousands of Canadians find themselves owing more in income tax than they can afford. For those who are self-employed or those with multiple streams of income, it may be a matter of not saving enough to cover the tax bill. Whatever the reason, if you owe the CRA money and are struggling to make your payments, it’s important that you understand the rules surrounding CRA debt forgiveness.
What Happens When You Owe the CRA Money?
If you owe the CRA money, you will have to pay back your debts in full. The CRA does not forgive debt and CRA Collections will take action to ensure that the money is repaid.
CRA Wage Garnishment
One method that the CRA can use to reclaim its money is through the garnishment of your wages.
In most circumstances, creditors who are owed money are required to get a court order before they can garnish your wages. However, the CRA does not have to go through a court review to start this process. Instead, the CRA can simply issue a Requirement to Pay (RTP) to a third party that owes you money or is holding your money.
Those who are self-employed and don’t receive a paycheque from a single source can also have their income garnished. The CRA can send an RTP to the companies or individuals that contract you to do work, requiring the money they owe you to be redirected to the CRA.
The CRA can also redirect any money that is owed to you by the federal government. This includes any credits or income tax refunds. Instead of being issued to you, this money will be used to reduce your tax debts.
CRA Liens and Seizures
The CRA also has the ability to put a lien on your home or property. The lien is used to secure the amount of debt you owe by establishing what is called “creditor priority” in the event that you sell your home.
Establishing creditor priority means that if you sell your home or property, the CRA will be the first creditor in line to get paid from the proceeds of the sale.
In addition, the CRA can seize and sell your assets and property including your car, boat, cabin, artwork, or even your home.
What Can You Do to Settle Your CRA Debt?
While there is no such thing as total CRA income tax debt forgiveness, there are CRA interest relief programs that are offered to reduce or waive tax interest and penalties.
CRA Taxpayer Relief Application
If you encounter a circumstance that is outside of your control such as losing your job or if you are involved in a natural disaster, you may be eligible for the CRA relief program. It provides taxpayer relief from penalties or interest.
The same is true if you can prove that you are in a position of extreme financial hardship that makes it impossible for you to pay your tax debt.
In order to receive any tax debt relief, you will have to prove your financial situation. The CRA will want to see all of your financial information including your income, your spouse’s income, household expenses, and assets to determine what kind of monthly debt repayments you can reasonably afford.
Negotiating with the CRA
The CRA may consider a payment arrangement if you can prove that you have tried to pay back your debt by reducing your expenses or by borrowing funds. After reviewing your financial information, the CRA will determine if too much of your income is going to non-tax debt each month.
For instance, if you have credit card debt or a personal loan, the CRA can structure a repayment plan that prioritizes CRA debt. This can make it difficult to pay your other debts and can result in a large sum of money going to interest payments.
There is no guarantee that the CRA will agree to negotiate the repayment terms on your tax debt. If you are unable to make your payments, the CRA can take legal action against you. These actions can result in serious financial consequences.
What to Do if You Can’t Pay Your CRA Tax Debt
If you cannot make your full CRA tax debt payments, you have three options, file for a Consumer Proposal, Division I Proposal or file for Bankruptcy. These options require you to reach out to a Licensed Insolvency Trustee (LIT).
Consumer Proposal and Division I Proposal
A Consumer Proposal or Division I Proposal are the two methods you can use to avoid filing for personal Bankruptcy while obtaining CRA debt forgiveness. This means that by filing a Proposal, you may have the chance to repay less money than you originally owed to the CRA.
A Proposal is a legal process that is administered by a Licensed Insolvency Trustee (LIT). Your LIT will work with you to develop your proposal which is basically an offer to your creditors to repay a percentage of what is owed or, to extend the time in which you have to pay the debt back.
When filing a Proposal, the repayment deal that is put forth to the CRA must be better than if you were to file for personal Bankruptcy. If your Proposal is accepted, it will stop all tax interest from accumulating as well as remove any wage garnishments or bank account freezes. If you meet all of the requirements of your Proposal, then you will be legally released from all of the debt included in the proposal.
You can also speak with an LIT about filing for personal Bankruptcy. Filing for Bankruptcy can result in the forgiveness of all debts by creditors, including your income tax debts owed to the CRA.
What to Do if You Are Seeking CRA Debt Forgiveness
In order to pursue CRA debt forgiveness through a Consumer Proposal or Personal Bankruptcy, your first step should be to reach out to a Licensed Insolvency Trustee. An LIT is the only debt help professional accredited by the Canadian government to assist Canadians with their debt. They will explain the CRA debt forgiveness rules and help you to navigate your options.
If you find yourself owing income tax to the CRA, and unable to pay, don’t hesitate. Reach out to the team at Adamson and Associates Inc. at 519-310-JOHN (5646).