Dealing With Debts Owed To Canada Revenue Agency

Individuals (and corporations) may find themselves in financial difficulty and Canada Revenue Agency (CRA) may be a creditor, possibly the largest creditor. This blog post will look at whether, and how, those debts can be included in a filing under the Bankruptcy and Insolvency Act.

There are several types of debts owed by individuals to CRA that can include:

1. Income Taxes;
2. GST;
3. Source Deductions (amounts held back from employee wages and not remitted); and
4. Liabilities as a Director of a corporation for those amounts not remitted by the corporation of which you were a director.  

First off, generally all of these debts can be included in either a bankruptcy or Consumer Proposal. In a sense, these debts are no different than amounts owing on a credit card, with some minor exceptions as noted below. Many Canadians seem to think these debts cannot be included – I suspect this is from reading websites addressed to U.S. citizens as debts owing for income taxes in the Unites States cannot generally be included in bankruptcy filings in that country.

The question of whether you should file a bankruptcy or a Consumer Proposal is a separate one (and not the subject of this article). It will depend on your assets, your expected future income, whether you wish to carry on your business and many other factors.

Secondly, debtors should be aware that you cannot make “deals” directly with CRA to settle your debts to them. There is no provision in the Income Tax legislation or the GST legislation to do so. You might be able to discuss a reduction in penalties depending on the circumstances, but there will not be any negotiation or settlement with CRA on the principal balance or any interest owing.

The exception to this rule is the Consumer Proposal.The Consumer Proposal provisions of the Bankruptcy and Insolvency Act do allow one to make a deal with CRA (and any other unsecured creditors) and CRA will accept those deals, although what they will accept will depend on what you owe, your assets, income, etc.

Finally, a couple of technical points to note:

1. If you file a bankruptcy and owe more than $200,000 to CRA for income taxes, you will not receive an automatic discharge from your bankruptcy. There will be a court hearing and the court will determine, based on your individual circumstances, whether you will be required to pay any additional amount into the bankruptcy in order to get your discharge.
2. If you file a proposal to your creditors and you owe source deductions, CRA will generally not approve a proposal unless the full amount of the source deductions owing is paid within six months. Since voting in proposals is done based on dollars owing, if CRA is the largest creditor, this may determine whether the proposal succeeds or fails.

If you have CRA debt and want to discuss your options,contact us to set up a free, confidential consultation to learn about typical CRA debt settlement scenarios and how we can help you establish a fresh financial start.