Dealing with Tax Debt
It can be tough to reduce or eliminate tax debt. Unlike many other forms of debt, there aren’t many options when it comes to eliminating tax debt. If you have no tax grounds to object, you cannot negotiate with the Canada Revenue Agency (CRA). You cannot ask them to reduce the overall amount owing. Only those people who are in extraordinary and rare circumstances can apply to have penalties and interest payments reduced. Even if you meet the very strict requirements for relief, the process of applying for the relief program is a long one and it can take up to two years for the process to resolve. During this process CRA can still take aggressive collection action against you.
These rare instances include circumstances where processing delays cause payments to be late, situations where natural disasters or serious illnesses prevent timely payment, and situations of extreme financial hardship, at levels that approach poverty. However, even in these situations, only interest and penalty charges may be reduced. The overall amount owing does not change unless you follow one of the options explained below.
This situation becomes even more difficult when you realize the power that the CRA has to collect tax debt. The CRA can freeze your bank account, garnish your wages and even seize your assets (house, RRSP, etc.) if you owe money.
Bankruptcy and Tax Debt
You can, however, include tax debt in a bankruptcy. Bankruptcy is a legal process that is designed to provide those who are unable to pay their debts as they become due with an opportunity to eliminate these debts and get a fresh start.
You can include debts such as credit card debt, unsecured lines of credit, personal loans and, yes, tax debt in a bankruptcy. You may also be able to include student loans, as long as you have been out of school for at least seven years.
Personal bankruptcy in Canada must be filed with a licensed trustee in bankruptcy. A trustee is a professional who is licensed by and registered with the federal government. They are able to administer bankruptcy processes. If you are in a situation where you are unable to repay your debts as they become due, speaking with a bankruptcy trustee may be helpful for you.
Not only can a trustee help you file for bankruptcy, but he or she will also review your financial situation and provide you with details on the other debt relief options that are available to you. If you decide that filing for bankruptcy is the right option for you, your trustee will ensure that all paperwork is correctly filed and submitted.
Your bankruptcy trustee will also review your assets and ensure that you are able keep those assets that are considered exempt. Each province maintains a list of exempt assets that are deemed necessary to live a basic lifestyle.
If you are struggling with debt, you may wish to consider bankruptcy. It is one of the few ways that you can eliminate tax debt that you are unable to pay.
Consumer Proposal and Tax Debt
Another option could be a consumer proposal. Like a bankruptcy, a consumer proposal is a legal process that is only allowed to be administered by a licensed bankruptcy trustee.
A consumer proposal can only include unsecured debts. This includes tax debt unless CRA has already put a lien on your house.
Through a consumer proposal, a person makes an offer to his or her creditors to repay debts in a manner that they can afford. Most consumer proposals involve repaying a portion of the debt in a series of monthly payments for a specific period of time. The remaining outstanding debt will be eliminated once the proposal is completed.
With a consumer proposal, the majority of your creditors must accept the proposal. If they do, then all of your unsecured creditors are bound by its terms. This includes the CRA, if you have tax debt.
Relief from Tax Debt
Both bankruptcy and consumer proposal provide you with legal protection. When you successfully file, all civil legal action against you to collect unsecured debt stops. This includes wage garnishment from the CRA and any other unsecured creditors. If you have tax debt that you are unable to pay, these two legal processes could help you. Speaking with a licensed bankruptcy trustee can provide you with additional details and help you get these processes started.