What should you do when the Canada Revenue Agency calls?

Tax debt can be a daunting prospect — particularly when it comes up unexpectedly. However, given the rise and persistence of recent scams, it is important to confirm that the Canada Revenue Agency (CRA) is truly calling you. 

How to confirm the CRA is calling

Telephone and internet fraudsters have been contacting Canadians over the past few years with unsolicited phone calls, falsely identifying themselves as the CRA, and informing the individual of unpaid tax debts. These scammers will generally attempt to scare victims into paying the non-existent debt, often by saying there’s a warrant for their arrest or requesting gift cards as compensation instead of cash.

The real CRA will never email or text you. They will always fully identify themselves on the telephone and know things about you that no fraudster will. Most importantly, in the event of a tax debt, the real CRA will send you a letter in the mail confirming the debt and the reasons for it. They will only expect you to make payment by cheque, online, or in-person through your bank to a CRA account identified by your social insurance number or business number account.

How to deal with genuine tax debts

Assuming you received a letter or call from the real CRA, you may indeed owe a tax debt related to circumstances such as:

• Self employment
• RRSP withdrawals
• Multiple employers / occupations
• Insufficient tax deductions
• Director’s liability for corporate debts
• Penalties or interest for unpaid existing tax debt
• Errors or omissions in your tax return or assessment

If your tax debt was unexpected, you’ll want to confirm with your tax preparer that your return was filed and assessed correctly. If you discover an error or omission, you may request an adjustment to the return, which may reduce or eliminate the balance owing.

However, if the assessment is correct, it is important to address this debt quickly to maintain a positive relationship with the CRA, maximize your payment arrangement options, and avoid punitive interest charges and penalties.

What happens if I can’t pay my tax debt?

CRA collections will generally accept a monthly payment arrangement for income tax debt over a period of six to eight months. They will likely require you provide proof that your income and assets prevent you from paying off the debt any faster if you request a longer extension. They will expect you to either sell or borrow against your assets to pay off the debt if possible.

If the CRA accepts a longer-term payment arrangement, it will be conditional on your staying up to date on your installment payments and return filings. They will also expect you to demonstrate each step you’ve taken to ensure you will not owe again on next year’s tax return.

What happens if I don’t pay my taxes or fulfill the payment terms?

The CRA has a much more robust collections toolbox than your average creditor. Unlike a credit card lender, for example, they do not have to sue a delinquent and obtain a court judgment to garnishee a debtor’s income and bank accounts.

Once the CRA determines justification for legal action, it can immediately issue a garnishment demand (o/a Requirement to Pay). They also have the power to register liens against real property and personal property, such as your house or car.

Circumstances where the CRA pursues legal action include instances where the tax debtor has either ignored the debt or failed to follow the terms of a payment agreement.

Can I stop legal actions once they have started?

Clear and frequent communication with your assigned collections officer is critical to avoid CRA legal action. Update them on any problems you’re encountering and reasons you may be unable to follow the original payment agreement.

If communication has broken down or the CRA has started legal action against you, such as wage garnishment, you still have the option to contact your collections officer to work out another arrangement. This may include reducing the garnishment to an amount you can afford or having it completely withdrawn in exchange for another payment arrangement. However, the CRA will not return any money your employer or bank may have already sent them under the authority of garnishment.

It's likely the CRA will continue with legal action to ensure collection in cases of significant tax debt, potentially causing financial hardship for you and others who depend on your income. This is where many people give up. They believe the CRA never forgives tax debts, and that it’s impossible to fight the federal government. However, that’s not necessarily true.

You still have options to prevent the CRA from taking or continuing legal action against you. In fact, the CRA may actually be willing to accept less than full payment.

Where can I turn for help?

A Licensed Insolvency Trustee (LIT) is an accredited debt professional, licensed by the federal government and vested with the power to prevent or stop legal collection actions. This includes most collection actions levied by the CRA. An LIT accomplishes this through two federally legislated debt relief options: Bankruptcy and Consumer Proposals.

Filing either a Bankruptcy or Consumer Proposal will put a stop to any legal action against the debtor — even the CRA must withdraw most types of garnishments. While they are not allowed to withdraw any previous liens against real or personal property, the CRA may not register any new liens subsequent to the filing of either process.

If you file a Consumer Proposal — an offer to repay a negotiated portion of the total debt you owe — the CRA may agree the process will result in recovering more tax debt than if you were to file a Bankruptcy. This often allows you to significantly reduce the total balance owing while providing payment terms and a timeline you can manage.

If you file a Bankruptcy — liquidating your assets and potentially contributing some income over a specified timeline to help repay your debts — the CRA may simply accept the recovery it provides (if any) and write off the remaining of your tax balance.

Achieve a fresh financial start

Whether you’re struggling with tax debt, credit card debt, or any other type of debt you cannot afford to pay, contact an LIT. The LIT will review your financial situation, determine your goals, and identify your options and opportunities to achieve a fresh financial start.

An LIT can determine whether you’re eligible for debt relief options such as a Bankruptcy or Consumer Proposal, identify other debt-reduction strategies you may benefit from, and offer a detailed explanation of each option. They’ll provide the information you need to make the right decision for your unique situation and help you on your journey toward a debt-free future.