134 – Tax Debt: Solutions That Work

Wayne Kay 00:04
Tax debt solutions that work. That’s our topic today on the Debt Matters podcast. We help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay.

In today’s show, we’re going to talk about, what is tax debt? You’ve done your taxes, you realize you have a debt. What do you do if you only have a small debt? What’s that look like if you have a larger debt, what can you do? When do you need to reach out to an LIT to get help with this situation? And what happens when you ignore the CRA debt?

My guest today is Leigh Taylor with LCTaylor Licensed Insolvency Trustee from Winnipeg, Manitoba. Thanks for being on the show, Leigh.

Leigh Taylor 00:49
Hi, Wayne. Pleasure to be here, as always.

Wayne Kay 00:51
Well, interesting discussion. We’re going to talk about tax debts. And when we talk about tax debt, what are we talking about?

Leigh Taylor 00:59
Well, I think one of the most common problems that people run into is getting behind in their taxes. They don’t understand it. Taxes can be complicated. When April rolls around and they expect you to pay your taxes, you don’t always have the money for it, and nobody quite knows what to do.

So it becomes a big problem for an awful lot of people. It’s enough of a problem when you’re working for somebody and they’re deducting basic taxes from your paycheque. But it’s an even bigger problem if you’re self employed and really have to figure out a way to do it yourself.

Wayne Kay 01:31
Yes, it takes such dedication, I guess, to make sure that you’re setting that money aside, because for a lot of people, that tax bill can be very high.

Leigh Taylor 01:40
Yes. And Revenue Canada, the CRA, I guess we call it now, doesn’t chase you until they really get serious about it. So you don’t necessarily get reminders.

Wayne Kay 01:50
Okay. And then when they get serious about it, watch out.

Leigh Taylor 01:54
That’s it.

Wayne Kay 01:54
That’s it. Okay. So, situations, what are you seeing that really caused people to be in tax debt?

Leigh Taylor 02:02
Well, you know, basically everybody is required to file income tax every year, file the return with CRA. That’s a legal requirement for perhaps the majority of the population that are on salary income with tax deducted every day by their employers. There’s not that much of a problem if they deduct the right amount, etcetera.

Doing taxes is sometimes something to look forward to. Not necessarily doing it, but oftentimes they’ll get tax credit money back from their returns and it feels like a bonus. Now, it’s not a bonus because it’s your own money. They deducted and they give it back. But nevertheless, for a lot of people, that’s not really a big problem.

However, for an awful lot of people – ones that operate their own business, people that are retired or living on savings or even their situation has changed during the year – filing a tax return can trigger more taxes owing. There’s lots of reasons for that, just in the basic way you file it, but you’re really required to file the return even if you can’t pay the taxes that are owing.

And it’s a good idea to do that because the penalties, the interest start accumulating almost immediately and you’re going to find yourself on a real slippery slope downward if you get into that kind of a problem.

Wayne Kay 03:18
Do you find a lot of people are actually kind of surprised that they have a tax debt when they get into this situation?

Leigh Taylor 03:24
I think a lot of people don’t file because, oh, I’m going to owe taxes and if I don’t file, I can put that problem off for a while. But failing to file creates even more problems for them and it can get serious.

Sometimes we deal with people who haven’t filed for four or five years and they’re not quite sure how much the tax debt is and they become more a little intimidated by the whole process.

If filing one tax return was intimidating, filing four or five for the last several years is even worse. Sometimes they don’t keep track of all their receipts and all of their T4 slips and these things. So they’re not even sure where all this information is or how to get it – a real intimidating problem.

And the reality of it is, it doesn’t get any easier. The penalties keep accumulating, the interest keeps accumulating, and Revenue Canada charges a lot of interest and they can even charge you with income tax evasion if you don’t file properly.

Wayne Kay 04:26
Wow. Okay, so you’ve done your taxes and all of a sudden you’ve got yourself this debt. What do you do?

Leigh Taylor 04:32
Well, the first thing to look at is – do you owe tax from last year? Have you paid them? Most of the time, for the majority of people that have their employer deduct so much after every paycheque, they find themselves a little bit of a tax debt. If you ignore it, it can grow. So you want to make sure that you correct the problem for next year as well.

Maybe you start making regular payments and Revenue Canada is pretty easy to get along with it. Small amount, but you want to make sure that you don’t hit the same problem again next year. If you have self employed income or income from other sources other than employer, then you are required to make quarterly installments and revenue. Can’t always tell how much those quarterly installments would be. And it’s important to make them for two reasons.

One, they start charging you interest if you miss one of them right from the day you miss it, not the end of the year. And secondly, it stops you from getting too far behind and then having a really big amount of money to come up with in April.

So if quarterly installments are required, you should be making them. You can also go to your employer and get him or her to deduct a little bit more every paycheque. There’s all sorts of formulas in the tax act as to how much they have – but depending upon your deductions or lack of deductions and kids and these sorts of things, charitable contributions can change a little bit from the actual figure.

So you can have your employer deduct a little bit more from every paycheque. Then when you get to next April and do your tax return, having worked hard to pay off a little bit that was up in previous years, you’ll find yourself maybe even getting a little bit of refund. So that’s something you can do if you can manage the tax debt and stop it from happening again.

Wayne Kay 06:17
I like to hear that CRA will actually play along with you and they will help you out from what I’m hearing you say. So if you have a fairly small amount but you can’t pay it right now, you want to get a hold of them quickly and deal with it yourself. You’re allowed to do that.

Leigh Taylor 06:32
Yes. Our experience with CRA is that if you get behind on your tax and you start to make some sort of monthly payments to get caught up, they’re not going to have a problem with that, assuming that’s a reasonable amount.

Wayne Kay 06:44
Right.

Leigh Taylor 06:44
What they’re really going to look for is when you file taxes next time, next April, and you still owe taxes and it’s getting bigger because you haven’t made any kind of allowances for the next tax. Now you’ve got two years in a row and you’re starting to fall behind.

You’re going to start getting to the top of a pile for tax audits and installment interests and all the other problems. If it’s just a few hundred dollars, it isn’t a big problem. It should be reasonably easy for you to get out of. You start getting into a few thousand dollars and the problem becomes a lot bigger.

Wayne Kay 07:17
Right. Well, what if you have one of those problems where you get that large tax debt and you can’t solve it with your budgeting? What do you do?

Leigh Taylor 07:26
Well, one thing you want to do if you have a large tax debt is seek to help an expert, a tax expert, an accountant that specializes in taxes. Find out what it is that’s creating this large tax debt. And are you making all your property deductions and how are you dealing with it so that you can pay the least tax possible? What can you do to make larger installments in that fashion?

So you want to be careful to not let the problem get worse. One of the things that you can do is if you end up with a large tax debt that you’re just not going to be able to get out of.

Wayne Kay 08:07
If it is getting too big, then you should get the help from a Licensed Insolvency Trustee such as LCTaylor.

Leigh Taylor 08:10
There are solutions, whether it’s a proposal or Bankruptcy, that can help you get back on your feet and eliminate the tax debt. One of the misunderstandings that a lot of people have is that the federal government, the tax debt that you owe, they think that it can’t be eliminated by way of insolvency of a proposal or Bankruptcy, but it can. There are special rules that apply to it and revenue can, may deal with it a little differently, but it is quite often the best way to deal with it.

Wayne Kay 08:49
So an LIT. I actually thought the same thing, that you couldn’t use Bankruptcies or proposals to get out of a tax debt. So who knows where these things come from. That’s why it’s important to check in with a Licensed Insolvency Trustee.

Leigh Taylor 09:05
An LIT can design a Consumer Proposal that will satisfy you and your creditors. The Consumer Proposal can also deal with the tax debt. It can allow you to pay a smaller amount over a period of time, maximum of five years of proposal, and they can get rid of the tax debt along with it.

So you’re going to be basing the proposal on your ability pay rather than the amount that’s owed. And Revenue Canada will have an opportunity to vote for or against the proposal, but they’re very practical about it. They’re going to look at it and know that, well, if I don’t vote for the proposal and there’s a good chance it’s going to end up in a Bankruptcy. And what are we going to get out of the Bankruptcy? Notoriously little.

The proposal oftentimes will be looked at favorably by all the credits, including CRA. And once accepted, the proposal is binding on all the parties and the creditors, including CRA, so they will no longer continue collections. Now, in a Bankruptcy situation, we have to file two tax returns for you in the year that you go bankrupt. One is called a pre Bankruptcy tax return. It goes from the beginning of the year to the date of Bankruptcy. And that’s designed to establish what your tax debt is.

At the date of Bankruptcy, we do a second return going from the date of Bankruptcy to the end of the year, called a post Bankruptcy tax return, that’s designed to get you back on track. If you owe money during the post, then that’s going to be your responsibility. But it really catches you up because you don’t want a situation where you go bankrupt on, I don’t know, March 15, only to find out that when you file your tax returns the next year, you still have a debt, tax debt that was accumulated before you filed. So it gets you back on track, and it effectively deals with these kinds of CRA debts.

Wayne Kay 11:10
How about self employed? I would think that would be even more difficult. Is it different?

Leigh Taylor 11:17
Well, the tax laws are a little bit different. The way that they’re handled in a Bankruptcy is a little bit different because when you’re self-employed, you’re subject to different taxes.

If you have employees, you’re certainly going to be making source deductions from the employees paycheques every payday, and you are required to submit the remittances to Revenue Canada. If you don’t, that becomes what is known as a deemed trust, or you’re holding the money in trust for Revenue Canada. And Revenue Canada takes that very, very seriously.

It’s the same with PST and GST. You will collect those from your customers when you have a sale, and you’re required to remit them.

So those are other taxes that self employed people are looking at. And you can get into an awful lot of trouble real quick if you don’t pay them when you’re supposed to.

Wayne Kay 12:12
Yes, I can see how that could go very sideways quickly. And if you just ignore the CRA debts, and I’m sure people have done this, what happens then?

Leigh Taylor 12:23
Well, they have a lot of tools they can use to go after you, and they could do it more efficiently than, let’s say, the bank. They can garnish your wages, they go directly to your employer, and they can take a substantial amount of your wages out of your paycheque every payday.

They can seize your assets, they can put a lien on your house and eventually seize and sell the house. They can seize your bank accounts, and if it gets bad enough, they could file criminal charges for income tax. And there’s no statute of limitations on tax debt as such. And CRA doesn’t quit.

Wayne Kay 13:01
Okay. So it’s not good to ignore.

Leigh Taylor 13:04
That’s right.

Wayne Kay 13:06
That’s a lot. How do you get started putting a solution in place if you are in this situation, you know, after you’ve gone through your own account and established that, yeah, darn, I do owe taxes.

Leigh Taylor 13:16
You want to talk to a Licensed Insolvency Trustee to find out what the options are. Would a Consumer Proposal work for you?

If it’s a larger company or business, it may be what we call a regular, ordinary proposal. Rules are a little bit different, but the results can be the same. You want to get a game plan together so that if it’s going to be a proposal, what is CrA likely to accept? There may be things that CRA wants to see in a proposal.

Things like the understanding that over the course of the proposal, you’re still going to be filing your income tax every year. You’re not going to get further behind on your taxes while you’re trying to complete the proposal. Some of these sort of standard clauses that CRA is going to want in a proposal, and the lit is going to be in a position to put one together that is likely to be accepted without too much of a hassle.

Wayne Kay 14:13
Okay. So there are options. Make contact. We talk about this all the time. You can get a free consultation. I’m going to give that information in just a couple moments. Any final thoughts that you want to share with us on this topic, Leigh?

Leigh Taylor 14:25
Yes, I think it’s important that people don’t ignore the tax situation. Like you just said, the LITs, particularly LCTaylor, will give you free consultations on this. So if you don’t have money to pay the taxes, that’s a good deal. You’ll find out what the rules are, what the options are, and what’s in your best interest. And if you look at it early enough, there will be several options that may be available to you.

You wait too long until Revenue Canada is garnishing your bank account – then you’re running out of many options and you may end up with Bankruptcy as being the only solution.

Wayne Kay 15:02
Well, great information, as always. Thank you very much for sharing your time with us to teach us all about tax debt and some solutions. Thanks very much, Leigh.

Leigh Taylor 15:11
Always a pleasure. Thank you.

Wayne Kay 15:13
Well, my guest, Leigh Taylor, and as we were just talking about, you can get that free consultation through LCTaylor Licensed Insolvency Trustee through the website lctaylor.com.

That’s it for another edition of the 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.