No one likes to pay taxes. But pay them, you must. The Canada Revenue Agency (CRA) has several powers to collect unpaid taxes. These include wage garnishments, seizure of investments, freezing bank accounts – to name a few. And be assured the CRA will pursue these collection options.
This timely podcast Licensed Insolvency Trustee, Bonnie Hooley of LCTaylor discusses the CRA and tax debt. A must listen if you are wondering if you can just ignore your tax problems. Bonnie addresses the following:
- Different options available to assist with tax debt
- Arbitrary assessments and what steps the CRA will take to collect taxes
- How the Bankruptcy & Insolvency Act can eliminate tax debts
- When to seek help from a Licensed Insolvency Trustee
Licensed Insolvency Trustees are federally regulated and approved by the Canadian government. They have extensive knowledge of the tax system and the options you have available to you if you are struggling with tax debt.
Read the Transcript
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across the country. I’m Wayne Kay and in today’s show we’re going to discuss the CRA, tax problems and what to do if you can’t afford it. We’re going to dive into some of the options for you.
Joining me today, Bonnie Hooley from LCTaylor, Licensed Insolvency Trustees in Winnipeg, Manitoba. Bonnie, thank you very much for being on the show today.
Thank you so much for inviting me. It’s wonderful to be here.
We’re gonna have some good times talking about taxes. Don’t people love talking about taxes? What do they say – the only sure thing in life is death and taxes? Is that what they say? So taxes are great when you can afford it but when things go sideways and you can’t – it’s not good because you have to battle the governments. And I assume that’s not an easy thing to do.
Not easy to do it on your own, that’s for sure. But fortunately, under the Bankruptcy Insolvency Act, there are things to help you with your tax debt when it becomes a burden greater than you can handle.
When we’re talking about tax debt, what are we talking about specifically?
Well, all kinds of tax debt. Usually it’s personal income tax, that people don’t pay, and they get behind on them. That’s very common for self-employed people. And if you’re running a business, sometimes you don’t pay the source deductions on time, or you don’t pay your GST on time, or you don’t pay your personal income tax, because you dip into it to run your business. So then tax can accumulate. And with Revenue Canada, their interest in penalties are so high, that the tax debt can snowball pretty quickly.
And that’s where you just put your head in the sand and say – well, I haven’t dealt with it yet. I’m just going to let it go.
Yes, and with Revenue Canada, that’s not something you really want to do, because they have ways of getting your attention. So often people will not file their taxes for a few years thinking – oh, I can’t pay it anyway.
But what Revenue Canada has done in the past is arbitrary assessments, which is not uncommon at all. What they’ll do is arbitrarily assess that you owe a huge amount of money and send you a tax bill. And you’re like, whoa, I don’t owe that money. Now, you’re sort of in reverse logic, because you’re trying to prove you don’t owe that money by getting your taxes filed, which is what they want to do.
But because you haven’t filed your taxes for a few years, a small amount that you might have owed starts to really accumulate with interest in penalties. Also, if you didn’t keep the data to file your taxes, and they arbitrarily assess you owe a bucket of money, you’re going to be liable for that debt. And so you sometimes then have to talk to a Licensed Insolvency Trustee to see what your options are for helping you with that debt.
So this is already feeling like a very uncomfortable topic. Just as you like to stress, you can feel the stress if somebody is in this situation – that it would be very, very difficult. How long do you have to keep all your receipts and information for?
Okay, I should know this, but I believe it’s four years. But I wouldn’t quote me on that, because I’m not an accountant, necessarily. But if you’re in Bankruptcy, then you don’t have to necessarily worry about keeping the receipts. Because if you don’t have them, and they arbitrarily assess you as owing for prior years, regardless of whether or not you’d owe them $1 or a million dollars, it’s going to get erased. So keeping the receipts after a Bankruptcy is not as important.
Right. But beforehand, just because you were talking about it, I thought it was seven years. But that could be just keeping all your tax forms and tax information. But that may be different for someone self employed. So what are some of the options to assist with tax debt?
First of all, I just want to point out that I mentioned and alluded to this a couple of times, that options are available under the Bankruptcy and Insolvency act. And I can’t stress that enough, because we often have people that come to us that say – Oh well, my accountant said that Bankruptcy won’t get rid of this debt or proposal under the Bankruptcy Act won’t get rid of this debt. So that seems to be an urban legend that continues to be spread.
But you absolutely can erase your tax debt through Bankruptcy. Now, whether or not a Bankruptcy to erase the tax debt is going to be the answer or proposal under the Bankruptcy Act – is going to depend on your situation and your assets and all that sort of stuff.
In a Bankruptcy you’re sort of cashing in and you basically are signing over everything you own, have a right to earn interest in, to the Trustee for your creditors – except for the things that are protected as exempt. But in a proposal under the Bankruptcy Act, you’re basically saying, I can’t afford to keep ahead of this, the interest and penalties are killing me. This is what I can offer.
So you could offer a settlement on your tax debt. Which, if you tried that on your own with revenue Canada and said – Hey I can’t afford this tax debt, would you take 50 cents on the dollar? They basically cannot agree to that, because then everybody in Canada would line up and say – Hey, will you take 50 cents on the dollar on my tax debt?
But if it’s offered as a proposal, under the Bankruptcy and Insolvency Act, then it’s being offered under legislation, and all creditors are going to be involved in that proposal. All the creditors are going to be voting on it. So in those cases, Revenue Canada will agree under the legislation to a lesser amount to erase the tax debt. So Bankruptcy is one option for getting rid of your tax debt, a proposal is another option. And clearly, if you can afford to pay your taxes, paying your taxes is the best option for your tax debt.
Even if it takes a couple of years maybe? Or is it an immediate thing?
Yes, if it’s going to take a couple of years, you’re going to have to do an assessment of your situation, to see what’s affordable. Because as I mentioned, Revenue Canada charges huge penalties and interest. And the reason I believe that they do that – is they don’t want to be in the lending business. They don’t want a five year payment plan with you.
They would rather you went to a lender that’s going to offer a lower interest rate and stop the penalties. So that you know, they carry the load of your debt, and you can get rid of your taxes. So if your taxes are not going to be affordable to be paid off in a reasonably short period of time, you should be talking to a Licensed Insolvency Trustee about what your best options are.
You mentioned that sometimes they may do this assessment and say – Okay, here’s your tax bill, this is what we think you should owe. Is it true then that they can say you owe this money, so we’re just going to garnish 100% of your income?
Yes, that is actually true. And so particularly if you’re self employed, because they consider your income is basically your receivables. So they can actually serve an enhanced garnishment on the companies that owe you money. And they can ask for up to 100% of the money that’s owed.
Now, they generally don’t ask for 100%. In Manitoba anyway, they’ll usually ask for 30%. But that’s still pretty high. And if you filed an assignment and Bankruptcy or proposal under the Bankruptcy Act, you could stop that garnishment.
Now one of the things to be careful of – is for enhanced garnishments, where they’re going after your receivables. Once the person that owes you the money, or the company that owes you the money is served the notice from Revenue Canada, any money that they owe you up to that point has to then be sent to Revenue Canada. So if you file a Bankruptcy today, and there’s still some receivables coming, and the enhanced garnishments already been served, you may not get those receivables because it was served pre Bankruptcy.
Any money you earn or they owe you after Bankruptcy – that would be protected by the Stay of Proceedings. So it’s important to always talk to a Licensed Insolvency Trustee as soon as possible. We can mitigate the losses and the damages with regard to that.
And when is the right time to reach out to a Licensed Insolvency Trustee – because you probably find that people wait just too long to reach out.
Many people do wait too long. Officially for being insolvent, you have to owe more than $1,000 and have difficulty paying your debt. So that’s pretty much everybody in Canada. So somewhere between then and when you really should come in to see us.
I guess my assumption on when you should come in to see us would be once you’re having difficulty paying your debts generally as they become due, or you’re starting to dip into this account to pay that account. And you know, sometimes you’ll do that for a month or two and you think it’s going to solve the problem. But if you’re starting to have to juggle things and things are starting to get backed up – it’s always better to talk to a Licensed Insolvency Trustee sooner than later.
Because, in the best case scenario, we’ll be able to say – great you came in on time. Here’s how you can get back on track and you’ll never need my services. But when you wait too long, sometimes the only option you have is then a Bankruptcy or a proposal under the Act.
Can they go after people who owe you money? What about maybe going after your own family for a tax debt?
Yes, now that can sometimes happen. People don’t realize that they’re even creating the issue. Some people will intentionally try to avoid paying their taxes by gifting their income to somebody else, or by transferring their assets to somebody else. And some people will do that on purpose, and some people will do it accidentally.
But section 160 of the Income Tax Act basically says that, if you transfer assets or money to someone at a time that you owe Revenue Canada a debt, they can actually go to the person you’ve gifted the funds or the asset to, to collect on the debt for the value of the gift that you gave them. So if you owe Revenue Canada money, you have got to be very careful about gifting anything because you don’t want to be gifting a tax debt, along with something that people are thinking is something charitable that you’re offering them.
Wow. Sounds like movie stuff. People moving stuff around. It’s quite something how elaborate it could be to try to hide money. And CRA has probably seen just about everything in that many years they’ve been collecting taxes.
Yes, they’ve written so many things into their act and also through court cases, and things like that – that there’s almost no way to avoid paying your taxes when you owe them, except to either pay them or file a Bankruptcy or a proposal under the Bankruptcy Act.
This is going to be a different question. Is it better to have an extremely high tax debt versus a smaller tax debt? Does the government look at you differently, because they say – well you’re obviously a very big self employed business. So is there different rules for different amounts of debt that’s owed?
Sort of. And there’s sort of a few parts to it when your debt is smaller tax debt – easier to get it under control and solve the problem without maybe losing your company. But if your income tax debt is over $200,000, and it forms more than 75% of your unsecured creditors, then you’re treated differently by the CRA and by the courts under the Bankruptcy and Insolvency Act.
For instance, a first time bankrupt, if they owed Revenue Canada $75,000 and they had another $75,000 in credit card debt or other debts – if they file Bankruptcy, they could be bankrupt for 9 or 21 months, and pay what’s affordable during that time, and could be debt free.
But if they owe more than $200,000, then they’re not going to have the debts automatically erased by doing the duties that are required of you, when you’re in Bankruptcy. The courts are going to want to have a look at that, and determine whether or not something more should be paid, than the average person that goes bankrupt. And almost always, if your income tax debt is more than $200,000, the courts will order that you pay back more as a percentage you normally would if your tax debt was less than that.
You kind of brought this up and I guess my question is – what kind of things do you have to do once you declare Bankruptcy?
Okay, once you file Bankruptcy, there are things that are required of you. They’re actually known as your duties. So there’s three basic duties.
One of the duties is that for the duration of the Bankruptcy, you’re going to be required to report any money you and your household receives, and where you spend it. Now, we’re not going to be criticizing how you spend your money. I believe the reason it’s put into the act as a requirement is just sort of that’s a good budgeting tool that people should be doing. And so you’re going to be sending in that report to us.
The second thing that you’re required to do is based on your income, and your household size. You’re going to be making payments to the Trustee. So your payment is based on your portion of the household income. And so that’s the second duty is that you have to make payments that are required under the Act.
The third thing that’s required of you is that you have to attend counseling sessions. There are two sessions that are required. The first session we talked about sort of what caused your financial difficulty and if necessary, we can refer you for outside counseling. If you’re interested in seeking things further, you talk about some basic budgeting. In the second counseling session, we’re looking at your future and saying, Hey, where do we go from here? What sort of things do I need so that I’ll have a more solid future? So I never have to meet you, Mr. Trustee again. Things like, do I have insurance? And do I have enough insurance? Am I over insured? Do I have savings? Do I have goals? Do I have investments? Should I be working toward investments? So we start talking about some long term financial planning in the second counseling session.
Those are the three major duties, other than providing us things to file your taxes and assisting us with realization of your assets, if there are any. But those are the basic duties that are required of you.
Okay, perfect. Great to know. Well, I think we’re coming to the end of our chat for today. What are your final words of advice that you’d like to share regarding taxes, and CRA?
Nobody likes to pay their taxes. It’s just we’d always have something we’d rather spend the money on. But we do get in situations where we’re behind on our taxes. And, unless you can get rid of that tax debt in an efficient, affordable manner – I would strongly suggest that you talk to a Licensed Insolvency Trustee to see what options are out there to help you. Because, as I mentioned, the tax debt can snowball. And interest and penalties grow pretty fast. And so that Licensed Insolvency Trustee can sort of stop that before it becomes an unmanageable problem.
And I think people need to know and if they’ve been listening to this podcast for a while – they do understand that that first contact that first meeting is a free consultation.
Bonnie, great information and if they want to reach out to you, they go to the website LCTaylor.com. Thanks very much for all the information.
Well, that’s it for today’s Debt Matters podcast. Just make sure that you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out our website debtmatters.ca. Thanks very much for listening.
About Bonnie Hooley
Bonnie Hooley has worked in the insolvency field for over 40 years. She attained her Licensed Insolvency Trustee license in 1999 and is the Past President of the Manitoba Association of Insolvency and Restructuring Professionals (MAIRP). Over the years, she has served on various boards within her community.