Tax Debts: What To Do When Revenue Canada Comes Calling

Tax debt can be a scary prospect, particularly if it comes up unexpectedly. However, given the rise of and persistence of recent scams, it is important to confirm that it is, in fact, the Canada Revenue Agency (CRA) that is calling you.

Will the real CRA please stand up?

Telephone and internet fraudsters have been plaguing Canadians over the past few years with terse, unsolicited phone calls — supposedly from the CRA — informing of unpaid tax debts. These scammers will generally attempt to scare victims into paying the non-existent debt, often in strange ways — such as threatening there’s a warrant for their arrest or requesting gift cards as compensation in lieu of cash.

The real CRA will never email or text message you. They will always fully identify themselves on the telephone and know things about you that no con-artist will. Most importantly, in the event of a tax debt, the real CRA will send you a letter in the mail confirming the debt and the reasons for it. And they will only expect you to make payment by cheque, online or in person via your bank to a CRA account identified by your Social Insurance Number or business number account.  

Dealing with Genuine Tax Debts

Assuming you received a letter or call from the real CRA, you may indeed owe a tax debt. These often arise in circumstances such as:

• Self employment
• RRSP withdrawals
• Multiple employers / occupations
• Insufficient tax deductions
• Director’s liability for corporation debts
• Penalties or interest for unpaid existing tax debt
• Errors or omissions in your tax return or assessment

If your tax debt was unexpected, you’ll want to confirm with your tax preparer that your return was filed and assessed correctly. If you determine there was an error or omission, you may request an adjustment to the return which may reduce or eliminate the balance owing.

Assuming the assessment is correct, however, it is important that you address this debt quickly to maintain a positive relationship with the CRA, maximize your payment arrangement options and avoid punitive interest charges and penalties.

What do I do if I’m unable to pay?

CRA collections will generally accept a monthly payment arrangement for income tax debt over a period of six to eight months. To receive a longer extension, they will likely require you provide proof that your income and assets prevent you from paying off the debt any faster. If you have assets which you can either sell or borrow against to pay the debt, they will expect you to do that.

If the CRA accepts a longer-term payment arrangement, it will be conditional on your staying up-to-date on your installment payments and return filings. They will also expect you to demonstrate each step you’ve taken to ensure you will not owe again on next year’s tax return.

What happens if I don’t pay my taxes or fulfill the payment terms?

The CRA has a much more robust collections toolbox than your average creditor. Unlike a credit card lender, for example, they do not have to sue a delinquent debtor and obtain a court judgement to garnishee a debtor’s income and bank accounts.

Once the CRA determines justification for legal action, it can immediately issue a garnishment demand (o/a Requirement to Pay). They also have power to register liens against real property (i.e. your house) and personal property (e.g. your car).

Reasons for the CRA to pursue legal action include instances where the tax debtor has either ignored the debt or failed to follow the terms of a payment agreement.

Can I stop legal actions once they’ve started?

Clear and frequent communication with your assigned collections officer is critical to avoid CRA legal action. Keep them advised of any problems you’re having and reasons you may be unable to follow the original payment agreement.

If communication has broken down or the CRA has taken legal action against you — such as wage garnishment — you still have the option of contacting your collections officer to work out another arrangement. This could include reducing the garnishment to an amount you can afford or having it completely withdrawn in exchange for another payment arrangement. However, the CRA will not return any money your employer or bank may have already sent them under the authority of the garnishment.

In cases of significant tax debt, it’s likely the CRA will continue with legal action to ensure collection — potentially resulting in financial hardship for you and others who depend on your income. This is where many people give up. They believe the CRA never forgives tax debts and that it’s impossible to fight the federal government. But that’s not necessarily true.

You still have options to prevent the CRA from taking on continuing legal action against you. In fact, the CRA may actually be willing to accept less than full payment.

Where can I turn for help?

A Licensed Insolvency Trustee is an accredited debt professional, licensed by the federal government and vested with the power to prevent or stop legal collection actions — including most levied by the CRA. They accomplish this through two federally legislated Life-Changing Debt Solutions: Bankruptcy and Consumer Proposal.

Broadly speaking, filing either a Bankruptcy or a Consumer Proposal will put a stop to any legal action against the debtor — even the CRA must withdraw most kinds of garnishments. Although they are not required to withdraw any previous liens against real or personal property, the CRA may not register any new liens subsequent to the filing of either process.

If you file a Consumer Proposal — an offer to repay a negotiated portion of the total debt you owe — the CRA may agree the process will result in recovering more tax debt than if you were to file a Bankruptcy. This will often allow you to often significantly reduce the total balance owing while providing payment terms and a timeline you can manage.

If you file a Bankruptcy — liquidating your assets and potentially contributing some income over a specified timeline to help repay your debts — the CRA may simply accept the recovery it provides (if any) and write off the remainder of your tax balance.

How do I know if I’m eligible for a Life-Changing Debt Solution?

Whether you’re struggling with tax debt, credit card debt or any other type of debt you cannot afford to pay, consider scheduling a Free Confidential Consultation with a Licensed Insolvency Trustee. During this no-obligation meeting, your trustee will review your financial situation, seek to understand your goals and identify your options and opportunities for a financial fresh start.

Your Licensed Insolvency Trustee can determine whether you’re eligible for a Life-Changing Debt Solution, like Bankruptcy or a Consumer Proposal, identify other debt-reduction strategies you may benefit from and offer a detailed explanation of every option. They’ll provide the information and perspective you need to make the right choice for your unique situation and help you get on the road to finally being debt free for good.