Debt, Taxes And Your Options

There are many forms of tax debt – personal income tax, GST or HST, PST and source deduction (payroll) debt are the most common. Personal income tax debt can arise in many different situations while GST/HST, PST and source deduction liabilities are generally incurred when operating a business, whether it be a sole proprietorship, partnership or corporation. While a corporation is intended, in part, to provide an individual with separation or protection from company debts, a personal director liability can be incurred on GST, PST and source deductions. In very limited cases, a director liability may also apply to corporate income tax.

It’s a common misconception that personal income tax, GST or HST, PST and other forms of tax related debt cannot be extinguished in a bankruptcy or proposal. This is however, incorrect. In most instances, tax related debts are treated no differently than a credit card or other form of unsecured debt. When a bankruptcy or proposal is filed, a stay of proceedings is established that provides the debtor with protection from creditors thereby stopping collection calls, garnishments and other collection measures. When the bankruptcy or proposal is completed, most tax related debts are extinguished along with the general body of other unsecured liabilities.

The reason this misconception exists is people tend to consult on this issue with friends or family, most of whom have little or no real technical knowledge, when the best course of action would be to consult with a Licensed Insolvency Trustee.

Dealing with tax related debts can involve some unique considerations including the following:

If you have personal income tax debt exceeding $200,000 and this represents 75 per cent or more of your total unsecured debt, the Trustee cannot grant you an automatic discharge even though you may have completed all requisite duties in your bankruptcy. In this instance, the application for discharge is heard by the Court and may be subject to a monetary condition whereby a percentage of the tax debt must be repaid. The amount, if any, to be repaid is at the discretion of the Court and several factors may be considered such as present income, circumstances under which the debt was incurred, whether the individual has previously act in good faith etc. The larger the personal income tax debt, the greater likelihood a monetary condition may be imposed and by extension the greater the amount to be repaid. Any such monetary condition results in additional funds being made available to the general body of unsecured creditors rather than just the taxation authority.

In cases where personal income tax debt exceeds the thresholds noted above, the Canada Revenue Agency (CRA) may oppose the discharge and appear in court to advocate for certain conditions to be imposed on the discharge. In most situations, a monetary condition would be sought, however in cases where an individual’s conduct is considered highly egregious, the Court may suspend or outright refuse to grant an Order of Discharge. The latter is rare.

Source deduction debts can have a deemed trust portion that creates a “super priority” over other creditors including some secured creditors. The terms of a Division I proposal must include a provision that all source deductions will be paid within six months of court approval of the proposal. The legislation does not require this same clause in consumer proposals, however, CRA may insist on it.

In proposals where the CRA is owed for larger amounts of tax related debts and there is a history of late filings, they may choose not to accept the proposal unless it includes a compliance clause that stipulates the debtor will file all future tax returns and pay all future tax debts (i.e. while the proposal is on-going) on or before the deadlines set out in the Income Tax Act, Excise Tax Act or other related legislation.

Time can be of the essence in dealing with tax related liabilities whether it be personal income tax, GST or HST, PST or source deductions. If you own property and the CRA or a provincial taxation authority registers a judgment on the title before the date of bankruptcy or a proposal filing, this judgment remains enforceable and maintains its secured status after the filing date of the bankruptcy or proposal. This is a powerful collection tool not available to other creditors. For example, the judgment debt of a credit card company registered on title before the date of bankruptcy or a proposal would no longer be enforceable after the filing date. As such, a Licensed Insolvency Trustee should be consulted immediately in cases where there may be significant tax debts. If necessary, addressing the debt through a bankruptcy or proposal before a judgment is registered on title could mean the difference between the tax related liability being treated as unsecured and extinguished in the proceeding or as secured and surviving the proceeding.

Avoid any misconceptions about your tax debts by consulting a Licensed Insolvency Trustee rather than relying on the advice of friends and family who do not have experience or knowledge in this area. Having this assessment completed as soon as possible could help you avoid possible garnishment of wages, bank account freezes, or registration of a judgment on your property.