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How Do You Solve Tax Debt Problems?

If you owe money to the Canada Revenue Agency (CRA) it can be tough to pay this tax debt. That’s because the CRA charges compound daily interest on all outstanding tax debts, as well as penalties for filing late. These charges can mean that the longer you go without paying your tax debt, the more you owe and the more difficult it becomes to pay. When you add this to the fact that the CRA has very strong collection powers, it becomes obvious why many people stress about paying their CRA debts.

If you owe tax debt, the agency is able to garnish wages, freeze bank accounts, seize property, and much more to collect the money that is owed. Of course, no one wants this to happen. The CRA knows this and it uses the threat of these actions to influence negotiations.

Making this situation even more complicated is the fact that the CRA has dominant collection powers and that they’re very aggressive when it comes to collection. If you don’t pay your debt tax and you don’t co-operate with the CRA, the agency can garnish your wages, freeze your bank account, and even register your debt in court and seize your assets.

No one wants to have any of those actions take place.

The CRA knows that people will do nearly anything to avoid collection action, so they often use the threat of these actions to influence negotiations. If you’re worried that the CRA could tell your employer about your tax debt and garnish your wages, for example, you might agree to payment terms that are difficult for you to afford. This can lead to serious debt problems.

For instance, the CRA can take money that is owed to you from other government agencies or departments and apply this money towards your outstanding tax debt. This means the agency can take HST/GST payments or Canada Child Benefits that you would otherwise receive, for example.

The agency can also take other actions such as garnishing your wages, freezing your bank account, or getting a judgment against you in court. If the agency can get a judgment against you, it can even seize your assets and sell them to generate funds to pay your taxes.

Obviously, no one wants any of these actions to occur. However, if you don’t pay your tax debt and you aren’t able to come to an arrangement with the CRA to make payments monthly (instead of in a lump sum), these collection actions aren’t just possible but quite likely. The CRA aims to collect all money that is owed to it and it knows that it has the power to collect. This means there is a very good chance that the CRA will come after you if you owe money. It won’t just forget about you.

Why Negotiating with the CRA is Difficult

If you owe a tax debt and are having trouble paying it, one option is to contact that CRA and attempt to arrange a payment plan. However, in practice, this can be more difficult than it seems. That’s because the agency treats tax debt owed to it is as the most important debt and it places this debt ahead of all others.

Since it knows that people do not want to risk having their wages garnished or assets seized, it can often get taxpayers to agree to unfavorable terms if it means avoiding CRA collection actions. Unfortunately, if you agree to a very aggressive payment plan with the CRA, you may have trouble affording your monthly expenses and paying off your other debts. This could mean taking on more credit card debt to make ends meet.

Another reason why it is difficult to arrange a suitable payment plan with the CRA is that the agency will never accept less than 100% of the tax debt that is owed to it. In certain situations, it may agree to reduce or eliminate penalties and possibly even interest charges, but it won’t budge on the amount owing.

While other creditors may be willing to accept a smaller amount rather than have a person default on a loan, the CRA wants everything that is owed to it. Again, this is because the agency knows that it has the ability to take strong actions to collect a tax debt.

How to Afford Your Tax Debt

As mentioned, the CRA will only accept 100% of the amount owed to it during a payment plan negotiation. However, if you are not able to afford the full tax debt, there may be an option available to you.

A consumer proposal is a legal process through which you make an offer to all your unsecured creditors to repay a portion of what you owe in exchange for the rest of the debt being eliminated. If the creditors that are owed 50% of the outstanding debt or more agree to accept the terms of the proposal, then all unsecured creditors are bound by the proposal. A consumer proposal can include tax debt owed to the CRA.

What are the options to deal with CRA Tax Issues?

The consumer proposal process can be an option for those who are unable to pay back everything they owe, but who are able to pay some of their debts. If this sounds like your situation, the first step is to meet with a Licensed Insolvency Trustee (LIT). These professionals are the only individuals who are able to administer consumer proposal processes. Most LITs will offer the initial consultation at no charge.

During this consultation, the trustee will review your finances and provide you with details on the options that are available. It is then up to you to decide how to proceed. If you believe that a consumer proposal makes sense, the trustee will determine what a fair offer to your creditors will be.

The trustee will then prepare this offer and present it to all your unsecured creditors (including the CRA). Unsecured debt is a debt that is not backed by an asset. Examples of unsecured debt include credit card debt, personal loans, lines of credit, and tax debt. Secured debt (such as mortgages and automobile loans) cannot be included in a proposal.

Once the creditors receive the proposal, they will vote on whether they wish to accept it. As mentioned, if those creditors that are owed more than 50% of the debt accept, all must abide by the terms. It is then your responsibility to make monthly payments as outlined in the proposal. If you make all your payments, the proposal will be complete, and the remaining debt will be eliminated.

While a consumer proposal is not the right option for everyone, it can be a good way to resolve debt problems (including tax debt problems) in certain situations. Contact us for more information.

Dealing with Tax Debt Problems and the Canada Revenue Agency

The most straightforward way to get rid of a tax debt issue is to pay the money you owe. Of course, this can be easier said than done. It becomes especially difficult to pay taxes if the CRA reassesses your tax return. When this happens, the agency looks back at a performance after it has been initially assessed and potentially makes changes. For instance, the CRA may deny certain expenses or deductions. If this happens, you could end up owing more money in tax debt than you assumed. You will also likely owe interest going back to the date that the original debt should have been paid. This makes it tough to pay the tax debt that you owe.

If you can’t pay your tax debt in full, here are some options that may work for you:

  • Arrange a payment plan with the CRA
    • The CRA may be willing to consider a payment plan that will have you make monthly payments rather than pay your total tax debt in full at once. This can make it easier to afford.
    • However, the agency will never agree to a payment plan that sees it receive less than the full amount owed to it.
    • The agency may also require that you prove that you attempted to pay in full by adjusting your budget and/or borrowing money. This means you’ll need to provide the CRA with detailed financial information, including your income, your expenses, and your budget.
  • Request taxpayer relief
    • In some circumstances, the CRA may be willing to provide relief from interest and penalties.
    • Situations that may be considered for relief include extraordinary circumstances (such as human-caused or natural disasters), actions of the CRA, or financial hardship that have prevented a taxpayer from meeting their tax obligations.
    • You must apply for this relief and explain why you are unable to meet your tax obligations due to circumstances beyond your control. You must provide proof as well.
  • Filing for bankruptcy or consumer proposal
    • A Licensed Insolvency Trustee can help you understand the debt relief options available to you and administer the bankruptcy or consumer proposal processes if this is how you choose to proceed.
    • Tax debt can be included in a bankruptcy or consumer proposal.
    • In bankruptcy, your unsecured debts are eliminated, and you can get a fresh start on your financial life.
    • With a consumer proposal, the trustee makes an offer to your creditors, often for less than the full amount owed. If those creditors that are owed more than 50% of the debt agree to the proposal, then all are bound by its terms.
    • With both a consumer proposal and bankruptcy, you receive legal protection from your creditors. This means they cannot take any action against you to collect the debt, and any activity that is in place must stop. This includes CRA collection actions that are used to collect a tax debt.

Negotiating Tax Debt with the CRA

When you contact the CRA to discuss a monthly payment arrangement, the agency will likely ask to see a copy of your budget as well as details on your income and expenses. You may have to prove that you attempted to pay your tax debt in full before they will agree to discuss payment options.

However, a potential issue is that the CRA considers debt owed to it to be the top priority. This means, once it gets a look at your budget, it will likely give strong preference to repaying tax debt, potentially at the expense of your other debt. For instance, the CRA could believe you’re paying too much towards your credit card debt each month, then offer a payment arrangement where you’re required to give the agency so much each month that you can only afford to pay the minimum on your credit cards. This will allow you to pay your tax debt more quickly, but it will also cost you a lot in interest on your credit card debt. It could also put you in a very tight financial situation.

This is why, if you’re planning to try to negotiate a payment arrangement with the CRA, you should have a professional on your side. However, it’s important to know that the CRA will never accept less than the full amount owed to it in a payment arrangement. The agency may reduce interest and penalties or give you more time to pay,  but it will never agree to take less.

Tax Debt Payment Issues

When you’re faced with significant tax debt, it can sometimes feel like you have no options. When you owe the CRA more than you can afford to pay, you’re in a difficult situation.

The agency wants the money that is owed to it and it knows that it can use its very strong powers as leverage to get what it wants. If you’re worried that the CRA might garnish your wages or freeze your bank account, for example, this affects the negotiation process. You will likely be more willing to accept whatever payment arrangement the CRA suggests just to prevent collection action from happening.

This could mean you’ll agree to terms that don’t necessarily make financial sense for you.

How to Solve Tax Debt Problems

Each financial situation is unique and, depending on your situation, there are different ways to approach a tax debt problem. Some people may be able to negotiate a payment arrangement that works for them, others could apply for relief from interest and penalties (this option is only open to those in certain situations), and some may take out loans or try to pay off their debt in full by cutting expenses.

Speaking with a Licensed Insolvency Trustee can help you determine which option is right for you. A trustee can review your financial situation and provide you with details on all the options available to you. For instance, filing a consumer proposal or a bankruptcy may help you deal with your issue, as tax debt can be included in these processes. However, trustees will give you details on all options, not just the ones they administer. Most trustees offer a free consultation so you can discuss your situation and find out your options at no charge.