Do you have income tax debt and are you concerned about your ability to repay it? Is the Canada Revenue Agency (CRA) demanding repayment terms that you cannot afford? Has the CRA frozen your bank account or begun garnishing your wages? If so, you may need help from a Licensed Insolvency Trustee (LIT).
One of the most common misconceptions I hear from tax debtors is that tax debt cannot be included in bankruptcy or a consumer proposal. The good news is that most tax debt is included in bankruptcy or a consumer proposal, and has no greater priority than any other debt.
A consumer proposal is one option available to tax debtors. A consumer proposal is a formal insolvency proceeding and represents a new arrangement with creditors, providing the debtor an opportunity to repay his or her debts – or a portion thereof - on more reasonable terms. An immediate benefit of filing a consumer proposal is that a “stay of proceedings” happens, which means collection action by creditors is stopped. In other words, if your wages are being garnished by the CRA or if your bank account has been frozen, filing a consumer proposal will stop this action and provide you with relief.
Once a consumer proposal is filed, creditors have 45 days to consider the proposal. Generally speaking, a consumer proposal will be accepted by the creditors provided that a majority in dollar value of the creditors agree. If the CRA is a majority creditor, you will need their support for a successful outcome.
So how easy is it to make a consumer proposal to the CRA? In my experience the CRA will agree to a consumer proposal in most circumstances, provided the following issues are adequately addressed.
Unfiled income tax returns
The CRA will vote against any proposal where there are unfiled income tax returns. Even if the CRA has raised notional assessments (i.e., where CRA creates a return on your behalf because you have not filed), you will be required to file proper returns before you file a consumer proposal.
Future tax compliance
While the consumer proposal will deal with taxes owing up to the date of filing your proposal, it does not deal with taxes that you must pay after filing the proposal. Your consumer proposal must contain a special clause stipulating that you agree to file your future tax returns in a timely manner, make instalment payments on self-employed income and generally pay your income taxes on time. If you are a tax debtor, your LIT should include this special clause when preparing your proposal.
Provision for current year’s taxes
The CRA will agree to allow you to include in your consumer proposal a provision for the income tax you will owe in the current year, up to the date of filing your proposal. The LIT will ask you to provide the information needed to calculate the year-to-date taxes owing.
Accurate income disclosure
Is your income accurately reported? The CRA has access to your past earning history and will compare your past earnings to your reported current earnings. If your current earnings are less than they were last year, ensure you provide the LIT with proper information to explain the reason for the reduction.
Fair and reasonable terms
When considering your consumer proposal, the CRA will consider whether you are making your best offer in the circumstances. The CRA will carefully review your income, expenses, assets and other information to determine whether you are putting your best offer forward (versus trying to pay as little as possible). This may require a reduction of some non-essential spending during the term of your proposal. Your LIT can give you tips and pointers around how to better manage your cash flow.
Dealing with the CRA and income tax debt can feel scary and overwhelming, but an LIT has the tools to help you deal with an unmanageable income tax situation. If you are dealing with income tax debt and want to know your options, contact us for a free, confidential, no-obligation consultation. The sooner you deal with the problem, the sooner you will find the necessary relief.
Lana Gilbertson is a Licensed Insolvency Trustee serving Greater Vancouver and Vancouver Island. To learn more about how Lana can help, contact her at firstname.lastname@example.org or 604-637-1599.
High personal income tax debt is given special attention in a Canadian personal bankruptcy proceeding.
Section 172.1 of the Bankruptcy & Insolvency Act defines a "personal income tax debtor" as a bankrupt who owes $200,000 or more in personal income tax debt, with the personal income tax debt making up at least 75% of the total proven unsecured claims.
A personal income tax debtor is not entitled to an automatic discharge, which means a court hearing is required for the bankrupt to be discharged from bankruptcy.
The Trustee is required to obtain the appointment for the court hearing. The timing of the court hearing can range from 9 to 36 months after the date of bankruptcy, depending on the circumstances.
At the discharge hearing, the court has the power to grant one of the following discharge orders:
In considering what type of discharge order is appropriate, the court will take into account:
In making its decision, the Court will also consider legal decisions made in similar cases as well as any recommendations from the Trustee and Canada Revenue Agency.
The Trustee's role at the court hearing is to provide objective information to the court on the causes of bankruptcy, the bankrupt's conduct and any other relevant information. The Trustee cannot advocate for or represent the bankrupt at the court hearing; however, the bankrupt is entitled to be represented by a lawyer at the court hearing (at the bankrupt's own cost).
If you are facing high personal income tax debt in Canada, filing for bankruptcy is just one option. A personal income tax debtor can also file a proposal to his or her creditors. A proposal, if accepted by the creditors, will provide the debtor with a new arrangement with his or her creditors with no requirement for a court hearing at the end of the proposal.
For more information about personal income tax debt in a bankruptcy or a proposal, contact me for a free consultation.
Lana Gilbertson is a Licensed Insolvency Trustee serving the Greater Vancouver and Vancouver Island regions. To learn more about how Lana can help, contact her directly at 604-637-1599.