The Canada Revenue Agency (CRA) has special powers for collections of unpaid taxes. These may include wage garnishments, freezing bank accounts, seizure of investments or putting a lien on your home.
But when it comes to the Bankruptcy & Insolvency Act, the CRA is treated like any other creditor in a Consumer Proposal or a personal Bankruptcy.
Licensed Insolvency Trustee, Derek Chase, shed some light on the subject of taxes – unpaid taxes, unfiled taxes and ways to deal with tax debt.
Other topics covered in this podcast are:
- Different kinds of tax debt
- CRA’s penalties and fees
- When you receive an unfair assessments from the CRA
- Consequences of not filing your taxes
- Options when dealing with tax debts
If you have tax debt that you cannot manage, speak to a Licensed Insolvency Trustee. They are federally regulated and approved by the Canadian government, and will give you honest advice about the options available to you.
Read the Transcript
Wayne Kay 00:04
Welcome to the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.
I’m Wayne Kay, and coming up today, we’re going to talk about Bankruptcy and does it clear your tax debt in Canada?If you owe money for your taxes, when you decide you’re going to declare, you’re going to go bankrupt, does that stop them from collecting?
What types of tax debt can you get protection from? What if you owe a lot of money, like maybe over $200,000? What does that look like? And what if you haven’t filed a tax return for years and years? What happens then?
To help us with this today. My guest is Derek Chase from Derek L. Chase & Associates Ltd. Licensed Insolvency Trustee serving Vancouver Island Sunshine Coast to BC and the BC north coast. Derek, thanks for being on the show today.
Derek L. Chase 00:58
You’re welcome, Wayne, it’s a pleasure to be here.
Wayne Kay 01:00
We’re always looking for information when it comes to Bankruptcies and people having a tough time. Today’s topic, is this kind of targeted a little bit more to a business owner who has to set aside their own taxes, or is this for anybody?
Derek L. Chase 01:16
A tax debt can really hit anybody depending on their setting. But yes, I would agree that the person that has their own business or the self employed or a contractor, I would say does tend to be the majority of the cases, but it’s not necessarily the only ones. We’ve seen other instances where people are drawing a pension and working and they get into tax difficulties. So it really is a broad catchment for people that get into tax problems.
Wayne Kay 01:44
I bring it up because I actually know somebody who is self-employed, so therefore they have to take care of all of these different things on their own, as in making sure they set aside enough for income tax. But all of a sudden, if they don’t, it can be a big hit.
Derek L. Chase 01:59
It really can. And I would say in my experience, that if you don’t pay attention to your taxes for two years, for two tax returns, it is a very difficult debt to catch because the interest and the penalties that Canada revenue agencies start to apply are harsh.
We’ve seen settings where people have made some pretty darn big monthly payments to try and catch that tax debt and they just can’t because their payment gets eaten up by penalty and interest. So it’s definitely one that you don’t want to lose control of and let get out of hand when it comes.
Wayne Kay 02:38
To somebody who’s having a hard time financially and they come and talk to you and they say, okay, we got to look at some options here of restructuring or Bankruptcy. Do they both take care of a tax debt?
Derek L. Chase 02:50
Quite often we hear that people feel that tax debt, you just can’t get away from it. They equate it with that death and taxes saying, but it’s not the case.
The Bankruptcy and Insolvency Act is one that can trump the income tax act. And therefore either a Consumer Proposal or a Bankruptcy can help a person get relief from their income taxes. And oftentimes it’s the setting that it’s designed to give that person a fresh start and it works. So even if the income tax department is garnishing your pay or frozen up your bank account, you can use the tool of a Bankruptcy filing or a Consumer Proposal to unlock that and move forward.
Wayne Kay 03:39
And it doesn’t matter how long, because as you’re saying, maybe it’s a couple of years back that you may owe them tax money from. Once you say, once you move into Bankruptcy, that pretty much stops them from collecting it. Right?
Derek L. Chase 03:54
Absolutely. Yes. A Consumer Proposal or Bankruptcy filing stops the income tax department along with all the other creditors from collecting. And there’s a thing called a Stay of Proceedings that comes into place so they’re prevented from collecting, which is really good.
Wayne Kay 04:10
Is there different types of tax debt that people can get protection from or is it just the one?
Derek L. Chase 04:17
You know, tax debt is a really broad phrase and for anyone out there that’s self employed, they know that they’re constantly doing different types of tax remittances. So the one that comes to mind for most people, I think, would be their personal income tax that gets filed every year in the spring. That’s certainly a common one.
But you can also have tax debt arising from say, GST collection that you have been collecting on your sales as a self employed person. And then also if you have tax debt coming at you because you are a director of a corporation and that corporation has its own corporate tax debt or payroll source deductions, you get protection from that as well. So it very much is protecting you from many different types of tax debt. And that’s a good thing because it’s just the way the system is supposed to work.
Wayne Kay 05:15
I guess the more tax debts, the more reason to actually do this. If you’re owing – like over $200,000.
Derek L. Chase 05:25
There has been a provision that’s been brought in by the government and I think rightly so, that if you have more than $200,000 of personal income tax debt, it’s not so easy to get relief from it. And the idea there is you should have a closer look at having to pay back a portion of that.
So in most, 90% plus of Bankruptcy filings, people get what’s called an automatic discharge, which means their debts are discharged at the end of a certain timeline, whether that be 9 months, or 21 months, or 24 months, or 36 months, if you’re a second time Bankruptcy setting. But when you have income tax debt that’s over $200,000, that automatic discharge is not available and the discharge has to take place at a discharge hearing.
And the whole purpose of that is to examine whether or not you know how much a person could pay back towards that $200,000. And over time, there’s been a lot of precedent that has been set in those discharge hearings. So there’s likely a similar situation somewhere in Canada to the person that’s currently applying for their discharge hearing. They may end up having to pay back a certain percentage of that $200,000 debt over time before they get what’s called an absolute discharge.
So I guess it’s a process to address situations where this income tax debt is higher than normal or usual and it’s set up so that Bankruptcy is just not too easy of a way to get away from that income tax debt.
And I think it’s a good idea. I think it’s fair and it’s reasonable. And you wouldn’t want someone having to pay back less if they owe $250,000 and someone who has a much lower debt load. It’s just not fair. So it’s a good process and we’ve seen it work well oftentimes before that discharge hearing, which happens at the courthouse.
Often there’s an agreement reached ahead of time through some negotiation and everyone’s on side with what the payments are going to be. So again, it’s very civilized and very fair, I think.
Wayne Kay 07:53
Well, what if you haven’t filed tax returns for years and years and then all of a sudden you have this debt, you know it’s open. Do they go back and look at the exact numbers? How does that all work?
Derek L. Chase 08:05
That’s a good question. Oftentimes the income tax department will notice that the person hasn’t filed for a long time and they will. Often they’ll arbitrarily assess those tax returns, which basically means they’re going to take a guess at how much is owed for those years. And then once they assess those returns arbitrarily, it bumps up to their collection system and they start collecting. So it can be a harsh way to hear from the income tax department.
And the thing that we’ve seen, though, Wayne, is that sometimes those arbitrary assessments are really wrong. Like they can be way too high. Let’s say someone was working as a self employed construction worker and then all of a sudden they got hurt and they didn’t file their returns for a number of years. And while the income tax department will probably assess based on what they’ve seen in the past when the income was much higher. So one way around that particular dilemma is to actually file those tax returns and then once they get the actual filing, they will replace that arbitrary assessment and that might be the way to solve it.
But probably more likely is that you haven’t filed your tax return because you know you owe. And those years and years, as I mentioned earlier, don’t take that many years to add up to a big number. And you can still do a Bankruptcy filing to get relief from that. A Consumer Proposal gets to be more difficult because the income tax department wants to know what the number actually is before they’ll vote to agree to a Consumer Proposal. So there would be some taxes to be filed in those in a Consumer Proposal setting. But certainly if you needed immediate relief like today, then a Bankruptcy filing could still be helpful if you haven’t filed your tax return for years and years.
Wayne Kay 10:09
And the reason is because as you said, a lot of people, they know that it’s not good, they know they owe money. In fact, the person I know who got into this situation, they stopped even opening their mail. I guess they thought, well, if I don’t look at it, I don’t have to stress about it as much.
Derek L. Chase 10:31
The good old ostrich head in the sand solution only works temporarily, doesn’t make it go away indefinitely.
Wayne Kay 10:40
Yes, eventually they come back. So when you were talking about, well, if you get behind sometimes it’s almost impossible to catch up with the penalties and the extra fees that they add on. Can you contact the government and negotiate that or are they pretty much steadfast on what their penalties are?
Derek L. Chase 11:03
Well, there is a program which they generally refer to as fairness – applied through a fairness program but we haven’t seen that work very well. I mean, that can work if your life has been disrupted because there’s been a death in your family and you missed some filings. But generally it’s difficult to get any break or relief through this fairness program. If you phone them up just out of the blue and say hey look, I’m having a tough time here.
I know I owe $20,000, would you take $10,000 if I paid back $1,000 a month for the next ten months? They don’t have the authority to agree to that. That’s taken out of their hands.
However, if you did that through a Consumer Proposal, through a Licensed Insolvency Trustee, then all of a sudden that’s allowable because you have a third party being the Licensed Insolvency Trustee, doing some analysis and providing income tax with some information as to whether that offer would be better than a Bankruptcy filing. So it is possible to pitch an offer or a proposal, but it has to roll through a Licensed Insolvency Trustee.
Wayne Kay 12:21
I guess at that point though, they know that there actually is a serious situation going on financially for the person when you’re involved. So I guess they look at it and say, well, what are we looking at? Is it going to be a proposal or will it be a Bankruptcy? And how much do they want to get – as much as they possibly can back?
Derek L. Chase 12:41
Absolutely. At the end of the day, they’re a creditor just like any other creditor. And I like to say if someone owed you $100 Wayne, and they said I can’t pay you, but you have to decide between getting 60 and 20 and you have to choose. And so who’s not going to choose the 60? In that sense, the income tax department is very much like you or I.
One exception that I should mention is that if the income tax debt has been on the books for a little while and you have a piece of real estate, well, the income tax department can put a lien on that real estate, and that’s just like a mortgage.
The amount that they put on that lien has got staying power. And that’s why the timing of this whole filing of a Consumer Proposal or Bankruptcy is very important. Because if they get that lien on there ahead or before a Bankruptcy filing takes place, then that income tax debt is a lot more powerful and a Bankruptcy doesn’t necessarily release it.
Wayne Kay 13:51
Can you walk us through at what point somebody should contact you if they’re in a bad situation like this?
Derek L. Chase 13:58
Well, I think the answer you hear across the country is sooner rather than later. I mean, all you’re really doing when you’re reaching out to a Licensed Insolvency Trustee for the first time is getting information. There’s nothing exciting beyond that.
And in our office and the offices that I know, that’s a free meeting. So it’s almost a no brainer, especially if you’ve been not opening your mail or losing sleep or you know that there’s a tax problem there because I haven’t filed for four years or whatever. Yeah, find out what can be done to get you back on the rails.
Wayne Kay 14:42
Yes, I just think it’s important for people to hear that over and over and over again because I don’t know, magically when they start thinking, well, maybe I can pay it off. I know maybe it’s more seasonal work and they’re going to have more money coming in and they hold off and something else happens. And I don’t know that they often think that this is a solution.
Derek L. Chase 15:05
It’s certainly not the first thing that comes to mind, but it is important to know. I like to talk with accountants about it because they often don’t know, and they’re in the tough shoes of telling their clients that, oh, you owe this money on your tax return and I don’t know what to do about it.
And it’s important to know there are tools that are available and they’re not unreasonable. So it is part of the toolbox, for sure.
Wayne Kay 15:30
I find that even surprising that accountants aren’t – because when I was asking the question about making if you owe over $200,000 in a tax debt at that level, you must be working with an accountant, one would think, possibly.
Derek L. Chase 15:45
Or maybe you haven’t filed for years and years. It could be a setting where you haven’t filed for 10, 15 years and it’s just added up.
But I’d say a lot of accountants do know about this, but there are a good chunk that don’t. And it’s just good to know that you can make a proposal to the income tax department, not unheard of. Yes, well, you know what, Wayne? Sometimes just one final point there. If you do get an assessment, it is important if you get an assessment that you think is unfair, it really is important to talk to your accountant because you can file what’s called a Notice of Objection, and there is a mechanism to dispute that.
Let’s say someone got a tax audit and they were assessed tax that they want to argue about. Well, there is a process to do what’s called a Notice of Objection, and that would all happen before you would get to the Consumer Proposal or Bankruptcy stage. So that’s important to look into as well.
Wayne Kay 16:44
Okay, great. That’s a great point. Any final words of advice for us regarding Bankruptcy and tax debt in Canada?
Derek L. Chase 16:52
I think if you do have tax debts, just realize that the person that you’re talking to on the phone, that they’re a person, and it’s no good to get harsh with them or abrupt – to just treat them like another person. And I think you’d be surprised to get some decent comments coming back, but also realize there are tools to fix the situation.
Wayne Kay 17:15
Terrific, Derek, thank you very much.
Derek L. Chase 17:17
You’re more than welcome.
Wayne Kay 17:19
My guest today, Derek Chase. You can learn more, or you can schedule that free consultation with Derek at bankruptcytrusteebc.ca.
And that is it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.