CRA Collection Rights: Not Your Ordinary Creditor

For most of us, finding out you owe a tax debt can be unnerving – particularly if you don’t have the money to pay it. It is, after all, owed to the government, and the government knows a lot about us. Tax debts are not like credit card debts. The government didn’t loan you the money; you owe the money because of a calculation set out in the Income Tax Act, or other taxation laws. The Canada Revenue Agency (CRA) is tasked with assessing and collecting income and related taxes from both businesses and individuals. So, what options are available to CRA to collect a debt?

To start, it’s worthwhile mentioning tax scams briefly, which have become more prevalent over the past several years. These scams usually involve a caller, pretending to be CRA, advising you that you have a tax debt and demanding that it be paid immediately, or you will either be sued or arrested. Some recipients of these calls become so frightened that they unwittingly send large sums of money to the scammers, sometimes using unorthodox payment methods. Be assured that if it is truly CRA calling, they will have already sent you something in writing advising you of the tax debt and will have knowledge of your personal circumstances that no scammer would have. And the payment method will always be legitimate – at your bank, by cheque payable to the Receiver General for Canada, or as an online bill payment you set up yourself identifying CRA as the recipient and using your Social Insurance Number (SIN) as the account number. CRA does not take people to court or arrest them simply for owing a tax debt. Below we will explore what privileges and powers CRA can exercise in relation to the collection of tax debts.

Assessment

For most individual taxpayers, we prepare our tax return in the spring of each year and file it with CRA - in keeping with statutory obligations. Your tax preparer may be the one to give you the bad news first – that you owe money on your tax return. From the government’s point of view, tax was already owed at the time you earned the income, but it does not become due and payable until April 30 of the following calendar year (with some exceptions). If you don’t pay the tax you owe on or before April 30, CRA will charge interest on the debt. Further, if you owe tax and fail to file your tax return by April 30 (extended to June 15 for self-employed individuals) you may also be subject to monthly late-filing penalties. Both CRA strategies are intended to encourage taxpayer compliance.

For those who are required to file a tax return and fail to do so, CRA may prepare a return on your behalf, basing the calculations on tax slips they have received, information they have obtained from financial institutions you deal with, or from an audit. These assessments rarely account for all deductions you might have claimed for yourself, and more tax could be assessed than what you might otherwise owe.

Notice

CRA will send you an assessment notice advising you of the amount of tax you owe, and instructions about how to pay it. Traditionally, these notices have been sent by mail, but the information is also available now on the CRA My Account website portal if you have requested and been provided with access. If you fail to pay the outstanding tax balance on time, and you have not appealed the assessment, you will receive collection notices requesting payment.

Set Off

CRA may automatically offset refunds or credits you may be entitled to, in order to pay the tax debt you owe. This can include the Goods and Services tax credit and various provincial rebates and credits. The Canada Child Benefit (CCB) is usually unaffected unless the debt specifically relates to a CCB overpayment. 

Collection Calls and Payment Arrangements

At some point, your tax file will be transferred to a CRA collections officer, who will call you to discuss payment of the debt. CRA expects taxpayers to borrow funds or rearrange their financial affairs in order to pay the tax balance in full as soon as possible. Where this is truly not possible, the collections officer may agree to a payment arrangement over time. Either way, if you fail to abide by whatever payment agreement you make with the collections officer, CRA will then be in a position to take legal action against you to collect the debt.

CRA Legal Action

Garnishment

If you fail to pay a credit card balance, the credit card company cannot garnish your bank account or your wages before obtaining a court-ordered judgment against you. This requires the credit card company to follow rules about serving you with notice of the court action. You would have an opportunity to file a defense – which may result in a court hearing. All of this can take a considerable amount of time. CRA is not bound by such procedural limitations. If you owe a tax debt and have failed to abide by a payment agreement, CRA may issue what is known as a ‘Requirement to Pay’ (RTP) to any person or business from whom you may receive money. The recipient, upon receiving the RTP, must send money to CRA, according to the terms stated on it. In the case of a bank, the bank must send CRA all money in your account(s), up to the amount of tax you owe. Until the full tax debt is paid, or CRA withdraws the RTP from your bank, your account will be unusable, as any money you deposit in it will be sent to CRA and will not be available to pay your bills. Your employer, upon receiving an RTP, might be obligated to send 30 percent of your gross wages to CRA each payday, which might make covering your normal living expenses challenging. One hundred percent of receivables due to a self-employed person might be seized. Unless you can convince your CRA collections officer that the RTP is causing you undue hardship, CRA is likely to leave it in place until the tax debt is paid in full.

Seizure and Sale of Assets

In addition to the RTP option, CRA may also place liens against assets you own and may choose to seize and sell those assets. Without notice to you, CRA may request that a federal court judgment be issued against you for the tax debt, which can then be registered against your assets. In the case of vehicles, this may take the form of a lien registration on the provincial Personal Property Security Registry (PPSR).

If you attempt to sell the vehicle, a potential buyer will take note of the CRA lien and may not be willing to buy the vehicle unless the lien is paid/removed. In the case of real property (houses, cottages, land), CRA may register on the title to the property, just like a mortgage. Although CRA is within its rights to seize and sell a taxpayer’s principal residence, it is its policy position that it will not. However, the same does not apply to any secondary property such as a cottage, which can be seized. It should be noted that once a CRA registration is placed on real property, it will not be affected if the individual files a bankruptcy – it remains on the title just like a mortgage – and interest on the debt continues to accrue. It’s important to note that once CRA has registered a tax lien against real property, even filing a bankruptcy will not eliminate the lien.

Tax Debt Relief Options

 As noted above, CRA has collection rights not available to most other creditors. A lot of people assume because of this, there is no way to get relief from tax debts – that you are stuck paying them, and in accordance with CRA’s demands. There are, however, some options. First, a tax debtor may make a submission to CRA under the taxpayer relief provisions to request a waiver of penalties or interest. This can be successful if there were extenuating circumstances that prevented the tax debtor from filing their tax return on time or paying the balance on time or in full. CRA seldom agrees to the reduction of the tax portion of the debt, so another option must be sought if that is necessary. The federal Bankruptcy and Insolvency Act supersedes the Income Tax Act, and people can get relief from most tax debts if they are overwhelmed and cannot make the payments that CRA expects. The first option would be a Consumer Proposal; a legislated debt-settlement option that allows the debtor to make affordable monthly payments over time. In this case, interest stops, and the settlement amount is usually less than the full balance owed. CRA may vote to accept or reject the proposal but may be outvoted by other creditors the debtor has. Alternatively, if CRA has rejected the proposal option or the tax debtor is in a particularly difficult financial position, they may need to opt for bankruptcy. In either a Consumer Proposal or bankruptcy, CRA is prevented from taking further legal action against the tax debtor and must participate in the insolvency process. 

To find out more about tax debt relief options such as a Consumer Proposal or Bankruptcy, and whether they can help in your situation, contact a Licensed Insolvency Trustee at MNP for a free consultation.