The April 30th income tax filing deadline has come and gone.  Some self-employed people have until June 15th to file their tax return, but if they owe income tax, interest is already accumulating back to the April 30th date – or possibly even to when your installment payments were due.  Tax time is a happy time for people who get refunds, but for those who don’t, it can be very stressful.

Income tax debt can occur for many reasons.  Typically if you have one employer throughout the year you will not find yourself in tax trouble.  Most employers calculate your deductions properly and there are no issues. Tax liabilities frequently result from having multiple employers, collecting Employment Insurance, receiving spousal support, getting lump sum payouts or being self-employed.

Filing Taxes On Time

It is very important to file your income tax returns on time, especially if you owe.  We see many people who are scared to file their taxes because they know they owe but do not have money to pay the tax debt.  This is only making the problem worse.  Sooner or later you have to file the outstanding tax returns.  If you wait, the debt will only be larger as CRA will assess you late filing penalties and charge you interest on the amount owing back to when it was payable. CRA may also do deemed assessments where they decide how much you earned and how much you owe (and it is typically significantly more than the real number) and collect accordingly.

If You Owe Money

If you owe money and cannot pay it in one lump sum, the Canada Revenue Agency (“CRA”) may be willing to make payment arrangements with you.  If your tax liability is a result of a one-off situation it is a good idea to contact CRA right away to discuss payment arrangements.  The sooner you make a plan with them the more cooperative they tend to be.  Once an arrangement is made it is imperative to comply as if you do not they may take actions against you.

CRA’s ability to collect on tax debts are extensive.  They can freeze bank accounts and garnishee wages without going to Court and getting a judgment like other creditors.  CRA can also register a lien against your property or seize account receivables if you have a business.

Tax Debt When Filing For Bankruptcy

Canadian Revenue Agency Tax Debt

Canadian Revenue Agency Tax Debt

When you have tax debt that you cannot pay, you may want to look at your options pursuant to the Bankruptcy and Insolvency Act after you have exhausted all other options.   There is a lot of misunderstanding surrounding tax debt and bankruptcy.  Many people falsely believe that income tax liabilities cannot be included in a bankruptcy or consumer proposals.

Upon filing a bankruptcy or consumer proposal a Stay of Proceedings goes into effect against all creditors.  This includes the CRA.  This means that any actions to collect the debt are stopped including garnishees, freezes on accounts are lifted and legal actions are stopped.

A pre-bankruptcy income tax is return is filed by the trustee.  Any liability right up until the date of bankruptcy is included in the bankruptcy.  It is possible that a provisional pre-proposal tax return can be filed.  This would be something to discuss with your proposal Administrator.

If you owe more than $200,000.00 in income tax debt and it represents more than 75% of your total unsecured debts you will not be eligible for an automatic discharge.  You will be required to attend Court for a discharge hearing at which time the registrar will determine the terms of your discharge.

Speak To A Licensed Insolvency Trustee First

If CRA has filed a lien against your property for your tax debt prior to you filing for bankruptcy, it will not be released by bankruptcy.  The Income Tax Act gives the CRA a secured status when this step is taken.  That is why it is imperative to speak with a professional Licensed Insolvency Trustee about your options sooner rather than later if you find yourself in tax and debt trouble.