Guest Blog: CRA Collection Is Back in Action. What You Need to Know

Ways you can become the target of CRA collection

When people think of tax debt, they typically think of personal taxes. These personal taxes arise from amounts determined to be owing based on your filed personal tax return (or T1 return) or taxes that are notionally assessed as owing by CRA (ie. determined based on estimates) when you’ve failed to file your personal tax return. This debt may include charges for late filing and late payment, such as interest and penalties.

But there are several other ways you can end up becoming a target of CRA debt collection activities:

1. If you operate a business as a sole proprietor (ie. not inside an incorporated entity), you may be required to collect and remit GST on those earnings. Typically, if your sole proprietor income is over $30,000 per year, this requirement is triggered. If you fail to register as a GST remitter or fail to remit the GST you’ve collected, you will personally owe CRA for the GST you should have charged and/or remitted.

Likewise, if you have any employees, you’re required to deduct and remit income taxes from them, as well as CPP and EI contributions, and you are personally liable if you don’t.

These debts are considered trust debts, because in the eyes of CRA the money you collect from others belongs to them, and you are only the intermediary collecting and passing it on to CRA. Trust debts take precedence over other debts, so if you owe these funds to CRA they expect you to pay them before you re-pay any other creditors, and they may take steps to get the money from others that you might have paid instead.

2. If you’re a director of a corporation (or a de facto director because you’re running the company), you have certain responsibilities. Among these are the responsibility to ensure the corporation is, where relevant, collecting and remitting source deductions (CPP, EI, and taxes) from its employees and GST on its income. If the corporation fails to do so, as a director you are personally liable to pay those on its behalf, although CRA has to try to collect from the corporation before it assesses you personally for those debts. If there are other directors, CRA can still assess you for the full amount owing, as each director is jointly and severally liable (meaning you all owe the full debt and CRA can decide to collect from any of you).

3. If you’re a director, shareholder, or otherwise within “arm’s length” of a corporation, you could be liable for income taxes (ie. T2 tax debt) owing by that corporation. CRA has the ability under section 160 of the Income Tax Act to assess individuals who received a transfer of property (including payment of dividends) if in their view those funds (or property) should have gone to CRA for payment of tax debt instead.

Likewise, if you receive a transfer of property (including cash) from a non-arm’s length individual who owes taxes to CRA, you could be assessed as personally owing those taxes. In other words, if your spouse, parent, or child transfers assets to you while they owe taxes to CRA, you could become personally liable to pay those taxes. This can even include situations where an individual becomes liable due to their spouse (that owes CRA) paying the entire mortgage payment on a property held as joint tenant with them.

4. Although not tax debt, CRA collects amounts you are required to re-pay for overpayment of Employment insurance (EI), Canada Pension Plan (CPP), and Old Age Security (OAS) on behalf of Employment and Social Development Canada (ESDC). They also collect overpaid child and family benefits and goods and services tax (GST/HST) credits, as well as overpaid COVID-19 benefits, like CERB.

5. The CRA collects defaulted Canada Student Loans (CSL) and Canada Apprentice Loans (CAL) on behalf of Employment and Social Development Canada (ESDC). If you miss 9 months of payments, your loan is sent to CRA for collection where it is treated like a tax debt in terms of the CRA’s powers to collect.

6. At this time the government has not provided any indication of how it will treat unpaid COVID-19 government-backed loans like the Canada Emergency Business account (CEBA) or the Highly Affected Sectors Credit Availability Program (HASCAP) loans. However, the possibility exists that CRA will eventually become the collectors for defaulted loans under these programs.

What CRA can do to collect

Initially, CRA will simply ask you to pay the amount owing. They’ll send you a notice advising you of what you owe, and letting you know that it’s due and payable immediately. At that point, if you can’t pay the balance in full, you can contact CRA to try to make a payment arrangement wherein you pay the full amount over a period of time that works for you and the CRA. However, do not assume that making partial payments (even when you have a formal payment arrangement) will stop CRA from further collection actions. And also, be aware that CRA charges compound daily interest at the prescribed rate on any amount owing until the balance is paid in full.

If you cannot or do not pay within a timeframe acceptable to CRA (per payment arrangement negotiations), or you fail to communicate or otherwise cooperate with CRA, they can and will take further action. CRA’s website says that “before starting legal action, the CRA must do the following: make 3 attempts to give verbal legal warning by phone and send 1 written legal warning letter”.

Once they have done that, they do not have to give you prior notice before they take specific steps. And once they start using these legal actions to collect, they typically will not stop unless the account is paid in full or you can prove that the action is causing you undue hardship.

Here are some of the options available to CRA, many of which are special powers the CRA has:

A. First off, let’s acknowledge that the CRA is not subject to the same limitations period as other creditors. Typically, in Alberta, creditors have 2 years to start legal action to collect a debt owed to them or they lose the ability to use court methods to collect (although certain actions you take can re-start the limitation clock). In the case of tax debt, CRA has 6-10 years from the date of assessment (depending on the type of debt) to start legal action to collect. And again, there are several actions you might take that could re-start that clock (even if inadvertent). It is highly likely that CRA will take action during that period, so it’s unlikely that your tax debt will become statute barred.

B. Typically, the first thing CRA does if you’re in default is keep payments that would otherwise come to you as a way of “setting off” the debt. If you are expecting any refunds, they will scoop those to pay down the debt. They can even keep some or all of your Canada Pension, Employment Insurance, and/or Old Age Supplement payments. Basically, they can keep money owed by any other federal agency or department and use it to pay down your debt. They are authorized to use these set-off options even while you are in compliance with a payment arrangement you’ve already negotiated.

C. A legal action CRA can use is issuing a demand on third parties to force them to pay to CRA funds they are holding for you or owe to you (ie. a garnishment demand). This could include your employer, your bank, or someone who owes you, such as your clients. While they typically only demand that 30% of employment income is sent to them, they can and will demand 100% of the funds in your bank account. In most cases, CRA has to wait 90 days after assessing (or re-assessing) you and then obtain a provincial judgment from the Federal Court to certify the debt before they take legal action, but they do not have to notify you in advance that they are applying for the judgment nor give you a chance to mount a defense like a regular creditor would. They simply notify you after it is done.

D. CRA can also register a lien against your assets and property, including your personal residence, to permanently secure the amount of debt owing so that if you sell your asset, your CRA debt is automatically paid from the proceeds of the sale before you receive any money from the sale. Again, CRA is required to certify the debt after 90 days, but they don’t have to give you prior notice they are doing this.

E. CRA can also use their certification of the debt to get a writ which allows them to hire a bailiff to seize and sell your assets and property including but not limited to cars, artwork, rental properties, or a personal residence. They usually give you a notice giving you another chance to pay before doing this, but they don’t have to. After forcing the sale of the assets, CRA will use the proceeds to pay the amount you owe plus any costs charged by the bailiff. Until they’ve been paid in full, the writ will continue to be registered and active.

Ways you can deal with the debt

As you can see, CRA has some powerful and unique tools they can use to collect tax debts and other debts collected by CRA. But there are some things you can do to manage these debts even if you can’t afford to pay them in full.

1. Appeal the assessment

By filing a notice of objection within 90 days of the assessment, CRA can no longer take collection action on the disputed amounts while the appeal is reviewed. (In some cases you can get an extension beyond the 90 days for up to a year, but the debt is still collectable while your extension application is pending). The restriction on collection action does not apply if you owe “trust debt” like sole proprietor GST or payroll deductions.

There are a number of reasons you might be able to successfully appeal the debt, depending on how the debt arose. Some examples:

• The debt was not properly calculated due to an error on the returns or the assessment, which may have been rectified in amended returns that you’ve filed.
• You were not a director nor a de facto director when the corporation’s debt was incurred (whether due to a resignation or no longer being qualified to act as a director), or you ceased being a director more than two years before the assessment was issued (you have to have formally documented the cessation of your director role).
• You were a director who was not responsible for day-to-day operations and you can prove that you exercised the degree of care, diligence and skill necessary to prevent the failure to source deductions and GST that a reasonably prudent person would have exercised in comparable circumstances.
• A section 160 assessment was made in error as you paid fair market value for the property that was transferred to you by the person that owes the tax debt (or there was other consideration), or the transfer was an arm’s length transfer.

2. Enter into a payment arrangement with CRA

If you cannot pay in full, CRA can provide some flexibility in terms of timing, based on your ability to pay. CRA will work with you to determine the payment amount and the length of the payment arrangement (which must include full payment of the debt, including penalties and interest) based on a discussion and review of your income and expenses. However, we note that CRA’s primary mandate is to close outstanding tax matters as quickly as possible, so they are generally not interested in payments over a long period of time.

Be aware that CRA will almost certainly require that you make financial disclosures to them as part of the negotiations. These financial disclosures may enhance their ability to use other collection tools if the negotiations fail, as they may identify assets they can seize or transfers of assets to others that they can use to assess others for your debt.

During payment negotiations CRA collectors will often recommend you take out a loan to pay your taxes. You will need to make sure you can afford the loan (including the interest charges) before you go this route – if you can’t afford to pay the debt to CRA over time, chances are you can’t afford to pay the loan either.

Once an agreement is in place, you must pay as agreed while continuing to file all returns on time and staying up to date with go-forward tax obligations. And CRA may periodically review whether the payment arrangement should be revised based on your circumstances. During the time you’re paying according to the arrangement, CRA will continue to use their set-off tools to scoop payments coming to you from any federal department and pay down the debt.

3. Apply for assistance with the debt

• Taxpayer Relief – CRA has discretion to cancel or waive penalties and interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control. This does not relieve you of any requirement to pay the principal amount of the debt, and you will still have to pay that within a timeline acceptable to CRA, but it will help you pay of the debt quicker by reducing the overall amount you have to pay.
• Get repayment assistance for student loan debt – if you can’t afford to pay back your student loans, you may be eligible for the Repayment Assistance Program (RAP), wherein you can reduce or eliminate your need to make payments on the loans, depending on your income (which is reviewed periodically). However, you are not eligible for RAP while your student loan account is in collections with CRA, so you would first have to “rehabilitate” your loan to get it sent back to the National Student Loans Service Centre and then apply for RAP. This will include making payments to bring your loan up to date. However, rehabilitation is likely no longer an option once your debt has been certified in court by CRA.
• Severe Permanent Disability Benefit – If you are permanently disabled you may qualify for this program wherein your student loans can be cancelled if your disability prevents you from studying and working for the rest of your life.

4. Make a creditor proposal

Whether you’re eligible for a Consumer Proposal or a Division I Proposal (depending on whether your total non-mortgage debt is under or over $250,000), if you can’t repay your debt you may be able to make a formal proposal to your creditors offering to pay them what you can afford, even if you can’t afford to re-pay the full amount of the debt. There's a common misconception that you can’t include tax debt in such a proposal, but this isn’t true. Licensed Insolvency Trustees regularly work with CRA to get such proposals approved. While a regular CRA collector cannot agree to forgive any portion of your debt, there is a special unit within CRA that deals with such proposals, and they’re empowered to make those kinds of deals where the situation warrants it. As mentioned previously, CRA’s primary mandate is to resolve outstanding taxes as soon as possible, so if you can put forward an attractive proposal, they are motivated to accept it. A potential exception to this is where CRA has registered their certified debt against your assets as a secured debt – typically this debt is not negotiable as long as the sale of the assets would otherwise result in the debt being paid.

One of the most important features of a Consumer Proposal or Division I Proposal is that when you make one there is an immediate “stay of proceedings” (even before your creditors vote on the proposal), which means that no one (including CRA) can start new legal actions or continue legal actions they’ve already started. Your interest and penalties stop being charged also.

A formal creditor proposal is an insolvency filing which affects your credit rating similar to the impact of a defaulted debt. In addition, you have to include all of your creditors, even those you want to keep paying (with the exception of secured creditors, like your mortgage holder or car loan company). Only a Licensed Insolvency Trustee can administer such a proposal, but the good news is they take over the discussions with your creditors so you don’t have to deal with them anymore. If your creditors accept your proposal, the proposal becomes the new legal agreement with them. So if anything changes for you in the future (even if it is a positive change financially), the payments they’ve agreed to are what you are bound by. Depending on your situation, creditors will often agree to accept payment of substantially less than what you owe, so this can be a good option if the debt it just too much for you to pay.

Note: Federal and provincial student loans have special protection in insolvency filings, such that they typically cannot be even partially forgiven (ie. they can’t be included in your proposal) unless you’ve been out of school for more than 7 years before you make the proposal.

5. Make an assignment in bankruptcy

If you can’t afford to pay your debt and you aren’t in a position to offer a formal proposal that your creditors would be willing to accept, you're likely eligible to make a bankruptcy filing to get relief from your debt once and for all. As long as you owe less than $200,000 in tax debt that you’ve been personally assessed for (or more than $200,000 but it makes up less than 75% of your total unsecured debt), your unsecured CRA debt is forgivable in bankruptcy just like any other creditor. If your tax debt is over that threshold you can still file a bankruptcy to get relief from CRA debt, but there will be extra steps (including likely extra time and extra payments) in order to complete the bankruptcy.

A bankruptcy is similar to a creditor proposal in many ways: there's an immediate “stay of proceedings” and a stoppage of interest, there's a negative impact on your credit rating, you have to include all of your unsecured creditors, and a Licensed Insolvency Trustee, who becomes the intermediary with CRA and other creditors, must be appointed. Some differences include:

• Your creditors don’t vote on how much you will pay. The amount you pay is dependent on your ability to pay based on your assets, your income, and your personal situation.
• Whereas you don’t lose any assets in a creditor proposal (unless you choose to sell them to fund the proposal), you may be required to turn over some assets to your Trustee in a bankruptcy, though often you can keep them by entering into an agreement to “buy them back” from the estate.
• There are additional things you must do during your bankruptcy period (which is typically 9-21 months for a first-time filer, unless you have tax debt over the threshold) like filing reports showing how much income you’re earning. If you don’t do all of these things or someone makes a legitimate objection, you don’t get to finish your bankruptcy and get relief from the unpaid debt.

Note: Federal and provincial student loans have special protection in insolvency filings, such that they typically cannot be forgiven due to a bankruptcy unless you’ve been out of school for more than 7 years before you file the bankruptcy.

When assessing these options for dealing with outstanding tax debt, one thing to keep in mind is timing. For example, appeals and Taxpayer Relief applications can take a long time to work their way through CRA’s system. In the meantime, the outcome of these options are uncertain and while you’re waiting CRA continues to charge interest on the amount owing.

On the other hand, the stay of proceedings and halting of interest charges provided by a proposal or bankruptcy filing are immediate. Once approved, Consumer Proposals can take less than 6 months (if you are able to offer a lump sum settlement) to a maximum of 5 years (if you’re making monthly payments) to complete. And a first time bankruptcy typically is finalized within 9 to 21 months, depending on your income level and the amount of tax debt you owe. The certainty of outcome and ability to move on with one’s life quickly can make an insolvency filing an attractive route where an individual can’t afford to pay the full debt anyway.

As you can see, tax debt is not a simple matter, and it can be risky to try to deal with it yourself in the face of CRA’s special collection powers. If you need help assessing your options for dealing with debt owed to CRA, reaching out to a tax professional or a Licensed Insolvency Trustee is recommended.