Is CERB dischargeable in bankruptcy?

The Government of Canada is beginning to recover Canada Emergency Response Benefit (CERB) payments where it has been determined that it was paid erroneously or was an overpayment.  The Office of the Superintendent of Bankruptcy (OSB) has told us that erroneous or overpayment of CERB are provable claims in bankruptcy (or a proposal). You can file bankruptcy, or a consumer proposal, to eliminate CERB debt.

Here’s the explanation:

Erroneous or overpayment of CERB is a releasable debt in the event of an insolvency (bankruptcy or consumer proposal) given that it is to be treated as a debt owed to the Crown pursuant to subsection 13(2) of the Canada Emergency Response Benefit Act (CERBA).  An erroneous or overpayment of CERB does not automatically constitute a debt that survives discharge under section 178 of the Bankruptcy and Insolvency Act (BIA). Section 178 outlines very specific debts not released by order of discharge, and CERB debt is not listed in this section. Debts that are not forgiven include court fines, support payments, debts due to fraud, for example. As a result, CERB debt is discharged by bankruptcy, unless these payments were obtained due to fraud.

The Canada Revenue Agency (CRA) had previously interpreted self-employment income eligibility guidelines for CERB to mean net income, not gross income, which resulted in some self-employed workers receiving a notice of CERB repayment based on income levels. 

CERB eligibility and self-employment

After significant public outcry, the government issued an update on February 9 announcing that self-employed individuals who applied for CERB and would have qualified based on their gross income will no longer be required to repay the benefit provided they met all other eligibility requirements.

This change comes after weeks of speculation and criticism of the CRA for not providing clear guidance regarding the gross versus net income test. There is no longer a need to file adjustments to 2019 tax returns to reverse previously claimed deductions in order to increase net income. 

If you must repay CERB because you were otherwise ineligible, or have taxes owing, interest relief is available until April 2022 within specified conditions. If you are unable to pay, tax obligations due to CERB remain dischargeable in a bankruptcy or consumer proposal.

Original article

The Canada Revenue Agency has begun issuing formal collection letters for CERB repayment to recipients who may or may not have been eligible for the payments they received.

You may have received a letter from CRA regarding CERB payments to be paid back along one of two themes we’ve seen to date:

• You incorrectly received CERB payments from both Service Canada and the CRA
• You did not earn the minimum income required to qualify

Double payments

When it was rolled out, the Canada Emergency Response Benefit allowed Canadians whose employment was directly affected by COVID-19 to apply for benefits through Service Canada, or through the Canada Revenue Agency (CRA), but not both. CRA has issued a clear collection notice demanding repayment where someone has received payments through both portals.

Income eligibility

To be eligible for CERB, you must have earned employment or self-employment income of at least $5,000 in 2019 or in the 12 months before applying.

To verify your income, CRA will look at your 2019 tax return, and any T4 or other income slips sent into the CRA.

If they cannot verify your income, you will receive a letter that states:

Based on the records we have at this time, we cannot confirm that you meet this requirement.

If you have earned income that meets the qualifications, and if you haven’t already done so, simply file your 2019 tax return.

Unfortunately, the rollout of CERB led to a lot of confusion as to income eligibility. The following income is not considered employment or self-employment income:

• Pension income
• Disability benefits
• Student loans and bursaries
• Family support payments
• Social assistance payments
• Employment Insurance (EI) earnings
• Canada Child Benefits (CCB) or Working Income Tax Benefit (WITB)
• Investment Income

Based on phone calls to our office, there may be a significant number of Canadians who collected CERB, assuming these forms of income qualified.  Many were under the impression that if I cannot get a job due to COVID, I can collect CERB. However, technically that was not the case. For example, if you were on disability and did not return, you did not qualify for CERB.

How will CRA collect?

The CRA has strong collection powers. Currently, they seem to be taking a softer approach to the collection of CERB overpayments.

CRA is encouraging Canadians who were not eligible for benefits to repay CERB voluntarily. They understand that many may have made an honest mistake and appear to be waiving penalties and interest on overpayments – at least for now. And this assumes that you received CERB incorrectly through an honest error.

If you do not remit payment by December 31, 2020, CRA will issue a tax slip, which just means they say you owe that amount to CRA.

This means CRA can:

• keep any future tax refunds
• keep any benefits or credits, including CCB and WITB

To date, the CRA has not threatened stronger collection action, but that may change.

How a CERB overpayment will affect your future taxes

There is another complication if you need to repay your CERB but do not do so before December 31. Because CERB is taxable, any payments you receive in 2020 that you have not returned before December 31 will be included as income on your 2020 tax return. This means you will have to pay tax on the full amount of CERB you received in 2020. You won’t be eligible to get a ‘refund’ for this tax if you pay it back next year until you file your 2021 tax return – an entire year later. 

What if you can’t repay CERB?

The Canada Revenue Agency has certainly indicated its intention to verify CERB benefits and claw back as much as possible where the recipient should not have received any payments. However, they have also indicated that they understand that many who applied incorrectly did so honestly.

We recognize that some people who applied may have later realized they were not eligible.

A bankruptcy or consumer proposal does erase government debts unless those debts arose due to fraud. It is our expectation that CRA will likely decide to accept CERB debt as dischargeable in a bankruptcy or consumer proposal based on the merits of each individual case.

If you have received a collection letter from the CRA, you have three options:

• Pay in full: If you can afford to, CRA is requesting that you repay any amounts before December 31 to avoid having your next year’s tax refund affected. You can pay online, through your CRA My Account or by mail. Make sure to indicate or choose options that your payment is for ‘repayment of CERB’.
• Make repayment arrangements: If you need more time to repay but can afford to pay the full amount, talk with a CRA agent to arrange a repayment plan. You can contact CRA at 1-833-966-2099.
• Consider a bankruptcy or consumer proposal: If you cannot afford to repay the full amount, talk with a Licensed Insolvency Trustee about your specific situation to determine if a bankruptcy or proposal can help.

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Penalties are levied on an unfiled tax return at a rate of 5% of the tax owing plus 1% for each month the return is late, up to a maximum of 12 months. If you repeatedly fail to report your income, CRA can charge additional penalties of up to 10% of your unreported income or 50% of the taxes owing. Interest is compounded daily at a prescribed rate on both the penalty and any unpaid taxes.

Once you file your returns and receive an assessment, you may apply for relief through the CRA taxpayer relief program. There are, however, certain conditions that must be met for the reviewer to grant your request. It’s also important to understand that these provisions only deal with penalties and interest, not your underlying tax obligation.

When might my tax interest or penalties be waived?

The CRA states that you may be granted relief from interest or penalties if the following situations have prevented you from meeting your tax obligations:

• Financial hardship or inability to pay
• Extraordinary circumstances like a natural disaster or medical condition
• Errors or actions by the CRA that lead to interest or penalties

What constitutes financial hardship or extraordinary circumstances?

When the cause behind the interest and penalties is taxpayer generated, the CRA will not easily give up their right to collect what it views as sanctions for negligent behaviour. Part of the reason is that they want to discourage the late filing of income tax returns and late payments from continuing in the future.

However, CRA recognizes that there are extenuating circumstances, events beyond your control or conditions where leaving the charges intact would cause undue hardship.

Examples of financial hardship would include:

• loss of employment with ongoing hardship
• times where the interest charge is a significant portion of the taxes owing
• where paying taxes would limit your ability to pay for necessities like food and housing

Examples of extraordinary circumstances could include:

• a disaster such as a flood or fire
• postal strike
• serious illness or accident
• death in the immediate family causing severe mental distress

CRA recognizes that unusual circumstances can negatively impact a person’s ability to both file and pay their taxes on time. Knowing this, CRA proactively extended the filing and payment due date for individuals during COVID-19 to September 30, 2020. Penalties and interest will not be charged until this date.

Making an application and form RC4288

If you feel that you qualify under one of these scenarios, the CRA will require that you fully disclose your situation and the reason behind your request.

You will be required to complete the Request for Taxpayer Relief form RC4288 available on the Canada Revenue Agency website or through your CRA My Account.

If applying for financial hardship, CRA will also require you to make a detailed disclosure of your finances to assess the validity of your claim. A financial hardship application requires the completion of form RC376 Taxpayer Relief Request – Statement of Income and Expenses and Assets and Liabilities for Individuals.

It is possible to write a letter clearly marked Taxpayer Relief and sending it by mail to a designated office. Your letter must have all the necessary information required in the above forms, and you should attach all supporting documents.

Is there a deadline for requesting taxpayer penalty or interest relief?

You have ten years from the end of the calendar year in which the tax year ended to make a request to the CRA for tax relief.

For example: To be eligible for consideration, a request filed during the 2020 calendar year must deal with an issue related to the taxpayer’s 2010 and later tax years. An application relating to a taxpayer’s 2009 and any previous tax year is not eligible for consideration.

What happens after I’ve submitted a Request for Tax Relief?

Your application will be reviewed by an individual at the CRA or a committee of CRA personnel who will prepare a report for consideration by the designated official assigned to your case. When the review is underway, you may be contacted concerning any missing information or if any clarification of specific points is needed.

The following factors can impact the CRA’s decision:

• Your past record of filing returns and paying on time
• Your efforts when working with CRA to deal with tax issues
• How timely you were in dealing with any omission or delay

The report will include an opinion on whether or not granting relief is warranted. The designated official will have the final say on whether to approve, partially approve, or deny your request.

What do I do if my request for tax relief is not approved?

If your request is only partially approved or denied, you can request a second administrative review. A second review request should include the following information:

• The reasons for your disagreement with the CRA’s decision, e.g., some of the relevant information was not considered or were misinterpreted
• Any relevant new facts, documents, or correspondence

To be fair and maintain impartiality, the second review will not be conducted by the CRA officials involved in the first review and decision. If the second review fails to change the outcome, and you feel that discretion was not adequately exercised during the second review, you can apply to the Federal Court for a judicial review of the CRA decision. This must be done within 30 days of the date you received the second review decision from the CRA.

What if I need relief from my underlying tax obligation?

As I mentioned at the start, the CRA Taxpayer Relief Provision can only waive penalties and interest. CRA representatives have no discretion to reduce the taxes owing as assessed based on your income tax return.

If you don’t qualify for this program, or if relief of interest and penalties is not enough to solve your tax debt problem, there is another solution. CRA will settle taxes through a consumer proposal. Hoyes Michalos can help you negotiate a reduction in your tax debt liability and create an affordable payment plan. As an option of last resort, CRA debt is dischargeable in a bankruptcy.

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The Canadian Emergency Response Benefit (CERB) allows those who stopped working due to COVID-19 to receive $2,000 for a four week period. With the program now extended to a total of 24 weeks, total CERB income can amount to $12,000 in earned income.

However, what happens when you file your 2020 tax return? Are CERB taxes or overpayments dischargeable in a bankruptcy or consumer proposal?

CERB is a taxable payment

CERB payments are before tax money. The government does not withhold any taxes at source on these benefits. This is different than traditional unemployment insurance where the government takes a small amount off for taxes.

CERB will be considered taxable income when you file your 2020 tax return. You will receive a T4A from the Canada Revenue Agency on any benefit amount you receive. You are liable for any taxes due on that income.

Students

The Canada Emergency Student Benefit (CESB) is also taxable to the student as would other student employment income. Students and parents will want to consider this when determining who should use tuition deductions.

Calculating how much tax you owe

The tax amount you will have to pay will depend on your total income for the year. The more you make, the higher your tax rate. If you were on CERB for most of the year and your income was low, your tax liability will not be large. If, however, you had a good job prior to COVID-19 and returned to work quickly you could be facing a larger than expected tax bill, as opposed to your typical refund.

This tax calculator by SimpleTax can help you estimate your total 2020 federal and provincial taxes. Simply enter income earned before and after CERB, plus any CERB benefit received to calculate your total taxes owing. Deduct from that any taxes withheld by your employer.

For example, if you earned $26,000 in employment income before and after CERB, plus collected eight weeks of CERB, your total income for the year will be $30,000.  Assuming you have no deductions, your total taxes payable would be almost $4,900.  If your employer deducted $4,000 while you were working, you will owe $900 to the CRA come tax time.

Another option is to check your effective tax rate from your prior year return. Most people have an effective tax rate of between 15% and 25%, but your rate will depend on the type of income you have and any allowable personal deductions.

As a rule of thumb, we recommend setting aside 20% of your CERB payments for future taxes.

File your taxes on time

Even if you believe you will not owe taxes due to CERB payments, file your tax returns on time to avoid any late-filing penalty. Filing past the deadline will add a penalty equal to 5% of the taxes owing, plus an additional 1% for every month your return is late (up to a maximum of 12 months).

Making your tax payments

If you have not saved enough to pay your CERB tax bill, there are still some options you can consider:

1. You can make payment arrangements with the Canada Revenue Agency. You will incur interest on the balance due until it is paid in full.
2. You may be able to apply under the CRA taxpayer relief provisions to cancel or wave penalties or interest if you can show ongoing financial hardship.
3. You can take out a loan to pay your taxes. CRA may request that you consider this option before approving any reduction in interest or penalties. However, only do this if you can borrow at a low rate. We do not recommend taking out a high cost installment loan as this can lead to further financial difficulties.
4. Yes, you can pay your taxes with a credit card through approved CRA providers. If you do this, have a plan to pay down your credit card debt as quickly as possible.

As the economy reopens and you are back to work, we strongly suggest making a plan to deal with any tax obligations.

Will CERB be dischargeable in a bankruptcy or consumer proposal?

Tax obligations

You can file a consumer proposal or bankruptcy to clear tax debts. Under current legislation, we believe taxes owing on CERB payments will be eligible for discharge under the Bankruptcy & Insolvency Act if those debts are not due to fraud.

CERB ineligibility and overpayments

Based on prior experience with EI overpayments, if a CERB application was made fraudulently the repayment requirement may not be released.

The CRA lists reasons why you may not be eligible to have received CERB payments

• You earned income above $1,000 for the eligibility period even though you were not expecting to. For example you returned to work during the 4-week period you applied for and collected benefits.
• You received both CERB and EI for the same period
• You applied for CERB but realized you were not eligible
• You received double payments for CERB

If you received CERB money incorrectly, you must repay the CRA. You may have already received a collection letter from the CRA for CERB ineligibility and repayment. You can return CERB money by online banking through your CRA My Account or mail a cheque to the Canada Revenue Agency.  Any monies repaid prior to December 31, 2020 will be reduced from your T4A for your 2020 tax year.

If you find yourself facing an unexpected and overwhelming tax debt along with other unsecured debt once CERB has finished, contact us for a free no-obligation consultation to explore your options.

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What Happens if You Fail to Pay the CRA on Time?

Interest

Interest charges are common with late payments in any industry, and the Canada Revenue Agency is no exception. The CRA charges compound daily interest on any tax balance owing, including penalties.

CRA sets a new prescribed interest rate every three months. As of June 2020, the interest rate on overdue taxes, CPP or EI premiums, or HST or GST remittances was 6%.

Penalties

On top of the interest charged on a late payment, there are also standard late-filing fines applied by the CRA, and these can be weighty, as well. File your return after the due date, and you can expect a 5% penalty on any amount you owed on that return. This amount grows by 1% for every month your return is late, up to a maximum of 12 months.

Furthermore, for those who have submitted previous filings late and paid similar late fees, the fine can double up to 10% plus 2% of your balance for each full month, now up to 20 months at the maximum.

It’s not uncommon to meet people with chronic late filings sitting on interest and penalties higher than the initial unpaid tax after failing to file their tax returns or owing money for several years.

So step number one, even if you think you owe money, is to file your returns to limit your obligation significantly.

Should You Pay Off Taxes with a Loan or Credit Card?

The objective of borrowing money to pay off your CRA debt is to avoid ongoing CRA interest costs and possible CRA collection actions.

Borrowing money to pay back taxes can make sense if:

• You can borrow enough to cover the full amount you owe to the CRA.
• The interest rate is less than the prescribed rate charged by CRA, which means something in the range of 5-6%. You want to pay less interest, not more on your tax loan.
• You want to avoid the risk that the CRA will place a lien on your home, garnishee your wages, or freeze your bank account or other assets.

Having said all that, taking out a tax loan is not a good idea for everyone. It’s crucial to borrow only an amount you’ll be able to pay back, or you’re just swapping one problem for another.

Ask your loan provider to outline any additional costs or origination fees. If you think you can pay off the loan early, ensure there are no hidden fees or penalties for doing so.

How To Choose The Right Tax Loan

So you’ve decided to take out a loan to pay your taxes. Before starting, you want to consider all the normal requirements for choosing the right type of loan.

• Consider the maximum credit limit you may qualify for along with the affordability of the monthly payments.
• Understand that your current credit score and income will affect the type of loan you are eligible for as well as the interest rate you will be charged.
• Determine if you should apply for a secured or unsecured loan. A second mortgage or Home Equity Line of Credit might come with a lower interest rate but there are risks of consolidating with a secured loan.
• Don’t apply too often as multiple applications can hurt your credit score.

Avoid high-interest personal loans that charge between 35% and 59% to borrowers with a below-average credit score or who otherwise will not qualify with a traditional lender.

Alternatives to Loans to Pay Off Tax Debt: Canada

Before applying for a new loan, consider these alternatives to dealing with outstanding tax debts.

Installment Payments or Saving

If you are a self-employed person, you may not have tax deductions at source. When it’s time to file taxes, you could be facing a bill of 25% to 30% of our net income. If you’ve earned business or non-taxed income in the past, CRA will estimate what your installments should be based on your net tax owing from the previous year, and any CPP or EI premiums payable on self-employed income.

If this is your first year earning a small business income, or you earn other income which you will have to pay taxes on in the future, make your own installment plan to set aside monies monthly into a separate bank account to cover your future tax bill. This will help you avoid the need to borrow when you file.

Yup.
There will be a lot of shocked Canadians when they see their tax bill next spring. https://t.co/zf7ZaA7Oa4

— Doug Hoyes (@doughoyes) May 25, 2020

Cashing in Investments

It may be possible to sell or cash in investments and use the funds to pay off your tax obligation. Beware however that this can come with a higher future tax cost. Withdrawals from an RRSP before retirement are subject to a withholding tax of 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000 and 30% for amounts above $15,000.  If the withholding tax rate is less than your personal tax rate, you may be facing another tax bill next year.

Can I pay taxes with my credit card in Canada?

The simple answer is yes, it is possible to pay your CRA taxes by credit card, PayPal or e-Transfer but you must do so through a third-party provider. There will be an additional fee to process your payment.

Borrowing by way of credit cards however is expensive. Most credit card interest rates are in the range of 19%. Only do this if you can pay off your credit card balance quickly.

CRA Debt Repayment Plan

CRA offers tax debt repayment plans, but only in cases where the person proves they can’t pay or borrow. Also, even if you are approved, they can stop the payment plan at any point if they think you can pay or borrow money to pay taxes.

Tax Relief

CRA is also willing to make provisions for certain people to receive relief from penalties and interest charges. People who need relief from their underlying tax obligation must file a consumer proposal or bankruptcy through a Licensed Insolvency Trustee.

“I owe $140,000 to CRA. They were all over me, so I hired a tax lawyer. I’ve spent $42,000 in legal fees, offered $5,000 lump-sum & then $2,300 a mo. for 36 months & CRA just said a final ‘No.’ to that”
Me: let’s file a proposal this week. $55K total.

— Scott Terrio (@ScottTerrioHMA) November 11, 2019

In Conclusion

Ultimately, nobody wants to be in the position of owing the CRA money on late tax returns. But sometimes there’s no option but to make a late payment. Life gets in the way and there aren’t many options to remit or extend your payments. More important than the dozens of different options for paying off your debt is one simple guiding factor: paying the CRA as quickly as possible.

Looking for more great insights into your debt payment process? Just want to talk to someone who knows what they’re talking about and has the experience to help you climb out of debt? Check out some of our other expert blog content, or get in touch with us at 1-866-747-0660, today, to find out more!

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The Canadian government has introduced support payments under the Canada Emergency Response Benefits Act to support workers who lose their income as part of the COVID-19 pandemic. The benefit allows people to claim $2,000 a month for up to four months.

The benefits cover Canadians who lost their job, are not being paid due to COVID-19, have become sick, are quarantined, or otherwise cannot work due to the coronavirus crisis, including people taking care of someone who is sick with COVID-19 and working parents who must stay at home due to school closures. CERB benefits are also available to self-employed and contract workers who may not be eligible for Employment Insurance.

The COVID-19 Emergency Response Act also provided financial assistance to families with children by temporarily increasing payments under the Canada Child Benefit (CCB).

These income support payments are there to help Canadians financially through the economic crisis created by lockdown and thus should be there for the benefit of the recipient and not their creditors.

Under the COVID-19 Emergency Response Act, the Canadian Emergency Response Benefit (CERB) and Canada Child Benefit (CCB):

• Cannot be assigned or given as security for a loan
• Cannot be garnished or kept by right of set-off by the government for government debts
• Is not garnishable for support payments
• Is not considered either income or property in a bankruptcy

In other words, you are entitled to keep any support income payments received under the COVID-19 Emergency Response Act. The CERB and CCB payments are not wages that can be garnished in Ontario or Canada. Don’t let a debt collector threaten you otherwise.

Please note that once these payments are deposited in your bank account, they are no longer in the form of a benefit payment. They become cash in your account and are subject to a legal right of offset by your bank if you owe money to that same bank. More information is available in our article covering possible creditor actions during COVID-19.

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It’s important to understand that while creditors, like credit card companies and banks, will almost always accept a reasonable proposal, CRA has their own set of rules. Unless their specific requirements are met, CRA may not accept a proposal that would be acceptable to other creditors.

Why is Canada Revenue Agency more “difficult” than other creditors? As many representatives of CRA have told me in the past, “Revenue Canada did not choose to be one of your creditors.” That’s true. You filled out a credit application with the bank, or the credit card company, and they decided to grant you credit. CRA never had the chance to make a credit decision; you didn’t pay your taxes, and now you owe them money, and that’s why they are never happy about being a creditor in a proposal.

Based on my experience, for CRA to accept your offer, it must meet these conditions. You must:

1. Offer CRA more than they would receive in a bankruptcy,
2. Meet their minimum return requirements (they won’t accept one cent on the dollar, even if it is more than bankruptcy)
3. Demonstrate that you can make the proposal payments.
4. Be up-to-date on all tax returns
5. Meet the honourable citizen test in your previous dealings with CRA
6. Promise to file all future tax returns on time.

To prove that you are trustworthy, it’s wise to include a clause in your proposal demonstrating your commitment to staying up to date. Here are the standard clauses that I include where tax debts are a significant debt in the proposal:

The Debtor confirms that all tax returns will be filed as due, and that all required tax installments will be made when due. If tax returns and installments are not prepared and paid when due, such breach will be considered a default in the terms of this proposal.

In simple terms, this means that if you file your tax returns late, or if you don’t pay your required installments, CRA can kill the proposal.

You may be a “quarterly remitter”, meaning you are required to make installment payments every three months. In my experience, CRA will be much happier (and your finances may be better as well) if you make installments every month, or even more frequently (weekly, bi-weekly, or semi-monthly if that’s how you get paid at your job). If filing taxes was a problem in the past, showing that you now have an accountant helping you will help.

The reason you must file all back-tax returns before making a consumer proposal is because it’s impossible for Canada Revenue Agency to know how much you owe if you haven’t filed your taxes. CRA cannot determine if the offer you have made is reasonable if they don’t know how much back taxes you owe.

To summarize, it is possible to file a successful consumer proposal even if CRA is a large creditor. However, before you file, you must ensure that the proposal makes sense, is affordable, that all your taxes are filed, and that you can demonstrate the ability to file and pay your taxes when due in the future.

If you have debts, including tax debt, and you want to find out if a consumer proposal may be the solution for you, arrange a no-charge initial consultation by contacting a licensed consumer proposal administrator today.

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What is a CRA Requirement to Pay

A CRA requirement to pay is a legal notice to a third party who might owe you money now or in the future instructing them to remit monies directly to the CRA. It is issued by the CRA when you have not paid your tax debts and have not made suitable payment arrangements to repay taxes owing. This might include your bank, employer, or a business customer.

Effectively a requirement or notice to pay acts as a CRA garnishment order issued to someone else to redirect monies they owe you to the Canada Revenue Agency instead.

What else you need to know as the taxpayer

• CRA can issue a requirement to pay without a court order.
• RTPs can be issued for any arrears owing to the Canada Revenue Agency, including income tax, HST, unpaid withholding taxes, and CPP or employment insurance overpayments.
• CRA can issue a requirement to pay against wages, business receivables, independent contractor earnings, rental income, RRSP and pension income, and many other types of payments.
• Anyone who receives an RTP is required by law to comply with its directive.
• CRA will send you a copy of the order.
• Your employer does not have to inform you before they begin garnishing your wages.
• Your bank will freeze your bank account immediately upon receipt of an RTP.

What to do if CRA has issued an RTP regarding taxes you owe

If possible, contact the CRA immediately and make payment arrangements to catch up on any tax arrears. If you have not already done so, file your tax return (returns). If CRA is confident you will honour this agreement, they may lift the requirement to pay voluntarily. A tax lawyer may be able to help you negotiate this repayment arrangement and solve any tax dispute in terms of how much is owing.

If you can’t pay back taxes, the only options available to eliminate outstanding tax arrears are to file bankruptcy or make a consumer proposal to your creditors. To do so, you need to contact a Licensed Insolvency Trustee. A tax lawyer or accountant cannot reduce the principal amount of taxes legitimately owing to the CRA.

Bankruptcy can eliminate tax debts and stop a CRA garnishment order or notice to pay.

You can also make a legal proposal to CRA to repay what you can afford through a Licensed Insolvency Trustee.

If you have a tax debt problem, it’s always best to talk with Licensed Insolvency Trustee before the CRA starts any legal collection action. For advice on your options, contact a trustee today to book a free, no-obligation consultation.

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How to find out how much you owe the CRA

The first step in determining how much you owe CRA is to file back tax returns. Filing late will increase your tax debt, making it harder to deal with.  The deadline for filing personal income tax returns in Canada is April 30. If you have self-employment income you have until June 15 to file your taxes. The penalty for filing a tax return late is 5% of the balance owing, plus 1% for each full month your return is late, to a maximum of 12 months.

That sounds simple, but many people are afraid to file their income tax return because they expect a big tax liability.  However, you cannot proceed with any solution for unpaid taxes until you know how much CRA taxes you owe.  Not filing at all is not an option as the CRA will not deal with you if you have outstanding unfiled tax returns.

Once your return is filed for each tax year, CRA will issue a Notice of Assessment confirming your taxes for the years filed.  They will add any penalties and interest. If you owe taxes a letter will ask you to either arrange payment or contact the CRA.

To find out how much you owe, we recommend registering for an online CRA account. 

1. Log into your CRA MyAccount (always to directly online, never through any website or email link to ensure you are not being directed to a CRA scam).
2. Click on the Accounts and Payments tab.
3. Next, click on Account Balance and Statement of Account.
4. Your account balance should appear.

Can you afford tax installment payments?

Your next step is to determine if you can afford to repay your past taxes on your own and if so, to arrange a tax repayment plan. CRA will make payment arrangements if you can repay your total taxes within one year. If you’ve been working with a CRA collection officer, be honest with them about your situation. Propose a tax installment plan that is both fair and affordable.

If you owe substantial penalties & interest, but can afford to repay the underlying tax debt, you can work with a tax lawyer to negotiate a reduction in penalties and interest. However, CRA will not negotiate a private tax settlement either directly with the tax payer or through a tax lawyer in Canada that does not see the total taxes owing paid in full.

CRA may request faster payment. You can consider taking out a loan to pay CRA, however, this will depend on your credit capacity and credit score.

Once you have a deal you can make your payments online but be sure you make all agreed upon payments in full and on time.

What are my options if I can’t pay back taxes owing to CRA?

It is not a good idea to ignore CRA collection attempts. CRA has very strong collection powers under the Income Tax Act and the Excise Tax Act to pursue CRA tax owing including the ability to issue a CRA wage garnishment, seize money from your bank account or put a tax lien on your home or other real estate.  They do not need a court order to take any of these actions. Owing a high tax debt can also impact your credit score.

Learn More: CRA Can Freeze Your Bank Account. Here’s What To Do About It.

If your CRA debt is large, you need to act fast to avoid these financially draining CRA collection activities. If you’ve reached the stage where you can’t afford to repay old outstanding taxes, then you have two options available to you in Canada for tax debt forgiveness.  It is important to know that these options are only available through a Licensed Insolvency Trustee in Canada.  No other tax professional can help you avoid paying back taxes you legitimately owe.  Only an LIT has programs designed to eliminate tax income tax debt or source deductions.

You can file a consumer proposal to negotiate with the CRA to repay what you can afford. Any other debts you owe will also be included in the proposal.  A proposal is accepted when more than half of your creditors, based on the dollar amount you owe, vote in favour of your offer. If the CRA is your largest creditor, they will need to be onside with any offer you propose.

Tax debts are also eliminated through a bankruptcy in Canada, just like any other creditor debts.

As soon as you file either a bankruptcy or consumer proposal, any wage garnishments stop, your accounts will be unfrozen and CRA can no longer place a lien on your home. If a lien has already been registered however a consumer proposal cannot remove the lien which is why you should act quickly if you know you can’t pay back your taxes.

If you have significant back taxes owing to CRA, contact a Licensed Insolvency Trustee to talk about how a consumer proposal or bankruptcy can help you eliminate your tax obligations. It is important to contact us as early as possible, so you have the maximum options available to you.

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When CRA can freeze your account

CRA can freeze your bank account without going to court and without notifying you ahead of time. The process begins with a Requirement to Pay. CRA will send a copy of this notice to you and to your bank. This tells the bank that you owe money to the Canada Revenue Agency and directs the bank to freeze the account and then forward any money in the account directly to the CRA.

Your bank is legally obligated to comply with a Requirement to Pay once received and will direct to CRA the funds on deposit up to the amount of the debt. Any future deposits can also be frozen and sent to the CRA until the tax debt is paid or the bank receives some form of legal notification to stop.

Here’s what you can do

1. Open a new account at a different bank. Deposit all new monies you receive into this account for living expenses until the situation is resolved. Update any direct deposits and automatic payments to go to this account.
2. If you can pay the tax, contact the CRA to make payment arrangements. This can include setting up agreed installment payments. However, if your situation has gone this far, typically you may not be able to afford this and may need more help to deal with the underlying tax debt problem.
3. Assuming you are unable to pay your tax obligation, you can file a bankruptcy or consumer proposal. Tax debts can be discharged in a bankruptcy and CRA will settle tax debts through a consumer proposal.

The Bankruptcy & Insolvency Act provides a stay of proceedings that stops the CRA from freezing your assets.   If you file a bankruptcy or proposal, your trustee will notify the bank (and the CRA) that you have filed a legal insolvency proceeding and have them unfreeze the account.   However, in most cases you should have already set up a new account.  The purpose of filing is to stop the CRA from finding your new account and freezing those balances as well.

If you’d like to see if a proposal or bankruptcy is your best way to deal with a tax debt, contact a Licensed Insolvency Trustee near you.

Some other things you may need to know

Can CRA freeze joint bank accounts?

If only you are indebted to the CRA, then the CRA will not be able to seize monies from a joint bank account you have with a spouse or anyone else.

If you are currently working with CRA on a repayment arrangement and are concerned about your bank account, you could consider opening a joint account for family living costs like your mortgage or rent.

Can CRA seize my RRSP & TFSA?

Registered investments like an RRSP or TFSA are treated differently than funds held in a bank account.  CRA can send a Requirement to Pay to the institution where your investments are held.  The investments are not immediately liquidated and sent to CRA.  However, the funds will be sent to CRA if you attempt to voluntarily redeem the investment.

Can CRA take my child tax benefit now called the Canada Child Benefit?

The CRA generally won’t seize your Canada Child Benefit to collect on a tax debt. However, money deposited to a bank account can be seized from the account if is frozen by a Requirement to Pay from CRA.

A different issue is where you have an overpayment from the Canada Child Benefit.  In that case, the CRA can apply your current benefit payments to the previous overpayment.

Unfreeze your accounts and future earnings

If you cannot make arrangements with the CRA to repay your tax obligation and have them voluntarily remove the hold on your bank account, it’s time to talk to a Licensed Insolvency Trustee about your options.

We offer free, no-obligation consultations. We can take a look at how much you owe the Canada Revenue Agency, as well as your other debts, and help you decide if a bankruptcy or proposal is the right way to eliminate those debts and gain a fresh start.

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In this article we look at how CRA can attempt to collect on unpaid tax and other government obligations, what specific debt collection and seizure powers the Canada Revenue Agency possesses and what your remedies are in dealing with CRA collections as well as some tax debt relief options.

CRA collection powers

The CRA can be very aggressive when collecting outstanding tax obligations. They have several legal remedies and collection tools that can be applied, sometimes without prior notice.

The Right of Offset: Because the government has so many branches and programs you may owe money to one branch yet be owed money from another benefit area. CRA can keep a payment owing to you and apply that payment towards other government debt. For example, CRA can keep any HST credit to apply against outstanding income tax. Similarly, if you have a refund coming to you in one year, they can offset that refund and apply it towards any taxes owing from prior years. They can even garnish CPP and OAS pension payments.

Garnishment:  The federal government can issue a garnishment, without a court order, to seize any funds owed to you from someone else. That means they can freeze your bank account or issue a CRA garnishment of your wages.  They will issue a ‘requirement to pay’ to your bank or employer who has no choice but to send money to the CRA instead of you, the tax debtor.

Registering your debt: Without warning, CRA can register your debt with the Federal Court of Canada. This has the effect of confirming the amount you owe (regardless of whether or not you agree) allowing them to take further legal actions. Like obtaining a court judgement order, this makes your debt a matter of public record.

Registering a lien: Once the CRA has registered your debt, they can register that debt on title against any asset you own including your home or car creating a tax lien on your property.

Seizing assets: The CRA can seize and sell assets that you own to satisfy any outstanding debt.

CRA debt collection process

The Canada Revenue agency collects many forms of government debts for various departments including:

• personal income tax,
• payroll deductions,
• HST,
• benefit overpayments, and even
• Canada Student Loans.

Collections

Update: Due to the financial hardship faced by many during COVID-19, the CRA has issued a policy statement suspending most collection activities for outstanding tax debt. Agents were encouraged to help taxpayers make appropriate payment arrangements to avoid financial hardship. However, collection staff are expected to begin contacting individuals beginning in the fall of 2020.

When you owe money, a CRA agent will contact you by phone or email. Their objective is to collect taxes, not punish you for late payment. If you can, make payment arrangements.

 If you can’t, this is when you should contact a professional like a Licensed Insolvency Trustee before CRA issues a Requirement to Pay notice. You want to consider your financial options, including tax relief, before the CRA imposes more stringent collection actions that can affect access to your income or assets.

Audit

Confirmation of your tax liability begins with an assessment and possible audit by CRA. The purpose of this audit is to confirm whether you are properly following all tax laws, have documentation to support any deductions, have declared all income sources correctly, and are eligible for benefits or refunds.

Individual taxpayers are chosen for an audit based on a risk assessment. With the resumption of audits since COVID-19, CRA is prioritizing audits and collection based on financial criteria including looking at high dollar taxpayers and taxpayers who have an unpaid tax obligation. They are also setting up processes to conduct Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Response Benefit (CERB) audits.

During the audit process, a CRA representative can review your tax return, bank statements, business records, T4s, receipts and any other information needed to confirm or complete an assessment.

Appeal

If you do not agree with your assessment, you can file an objection and, if this does not work, appeal to the tax court of Canada. This generally requires the help of a tax lawyer as the documentation can be confusing and you want to ensure you are correctly interpreting the tax code.

Taxpayer relief requests

Assuming you do owe the money, you have a couple options going forward:

• Make payment arrangements with the CRA to pay off your tax debt over time
• Apply for taxpayer relief to request a reduction in penalties and interest
• File a bankruptcy or consumer proposal to eliminate the underlying tax debt.

Update: CRA waived all interest charges on existing tax debts from April 1, 2020 to September 30, 2020 (June 30, 2020 for GST or HST).  Interest and penalties before and after that period continue to apply but can be reduced if you can prove ongoing financial distress due to these charges.

Limitation period

The Federal Government is not subject to provincial limitations periods but CRA does have its own Statute of Limitations.

The rules are complicated, and the limitation period can be started over by certain events however in general, for individuals:

• There is a restriction for most personal tax debts against collection during the first 90 days after a notice of assessment or reassessment is issued. This gives you time to consider your financial options.
• There is no 90-day collection restriction for HST, PST or payroll deductions.
• The CRA has 10 years to legally enforce collection (6 years for payroll deductions)

If the CRA is concerned, they can apply to the Federal Court to waive the restriction period.

There are many actions that can restart the limitation period, including making or proposing a payment, filing a notice of objection, appeal or asking for a reassessment. We do not recommend you try and wait it out. CRA will certainly act to enforce any rights they have to pursue collection action long before this period expires.

How the Insolvency Act overrides the CRA collection process

The Bankruptcy & Insolvency Act, like the Income Tax Act, is federal legislation.  In most situations, a bankruptcy or consumer proposal stops the Canada Revenue Agency collection process and eliminates the debt.  There are some limited exceptions to that general rule which would be reviewed with your licensed insolvency trustee.

Take action before a lien is placed on property

If you own a house, or any other asset, you will want to settle or file insolvency before the CRA places a lien on your property. Tax liens are considered secured debt, and secured debts do not get discharged either through bankruptcy or a consumer proposal.

Confirm how much you owe

The CRA is willing to settle outstanding unsecured tax debt through a consumer proposal. However, they will first want to confirm how much debt is owing which means you will need to file all outstanding tax returns.

Canada Student Loans and CRA collection

Student loans that are in arrears are sent to the CRA for collections. Government guaranteed student debt can be eliminated through a consumer proposal or bankruptcy as long as you have been out of school for a minimum of 7 years.

CERB, CEWS, CESB collection

CERB and related benefits are considered taxable income. Many Canadians, not used to making installment or year end tax payments, are likely to face a tax bill due to CERB or CESB. The CRA will also be conducting audits of CEWS recipients to ensure they met appropriate qualification guidelines.

Income taxes due because of CERB or CESB can be discharged in a bankruptcy.

It is still uncertain how the CRA will deal with CERB or CEWS overpayments under the Bankruptcy & Insolvency Act. While tax debts can be included in a bankruptcy or proposal, debts due to fraud cannot be discharged. CRA has unofficially advised that they may treat overpayments similar to EI overpayments. That is, on a case by case basis.

Stop CRA collections

If you are dealing with more tax debt than you think you can repay, only a Licensed Insolvency Trustee has programs that can stop all CRA collection actions and eliminate your tax debt.

As mentioned, you want to act before the CRA issues a tax lien or other secured charge on your assets. Wage garnishments are best stopped before they occur, however a bankruptcy or consumer proposal can stop an active garnishment order.

Contact us to talk with a Licensed Insolvency Trustee about your situation to see what options you have to resolve outstanding CRA debts.

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