Dealing with the Canada Revenue Agency (“CRA”) during tax time can be stressful for taxpayers. However, tax debts can create a tremendous amount of stress for individual and corporate taxpayers alike. Sometimes tax debts create an unforeseen insolvency issue which requires a taxpayer to enlist the assistance of a bankruptcy trustee to file a consumer proposal or assignment to bankruptcy to compromise their tax liabilities. However, depending on the amount of tax debt (usually if the personal tax debt exceeds more than $200,000.00), legal counsel from the Department of Justice will oppose a tax debtor’s discharge from bankruptcy. CRA will usually insist on payment to the tax debtor’s bankrupt estate representing anywhere between 20% – 70% of the tax liabilities in tax-driven bankruptcies .
Where CRA is the largest – or only – creditor it is usually prudent to get advice whether there are grounds to fight the tax assessment or deal with the CRA debts outside the insolvency context.
Ignoring your tax debts is generally a bad idea. CRA has the ability to have the tax debts certified as a judgment in Federal Court, and register this judgment against a taxpayer’s interest in land. CRA can then proceed with a forced sale of the property to satisfy the judgement. Furthermore, CRA can freeze bank accounts and garnish wages, which can be highly disruptive to a taxpayer’s personal life or business. In other cases, CRA will hire bailiffs to seize and sell property of the tax debtor.
Outside of the insolvency context, there are a number of mechanisms that can assist taxpayers in resolving their taxes issues with CRA. A cursory list is below – as each of these topics could easily cover its own blog post.
1. Dispute the Tax Assessments/Reassessments
Pursuant to section 152 (8) of the Income Tax Act once a tax assessment is made, it is binding unless set aside by objection or on an appeal at the Tax Court of Canada.
Taxpayers have the right to dispute their tax assessment or reassessment by filing a Notice of Objection to the Chief of Appeals in the taxpayer’s local tax service office. There are strict deadlines to file a Notice of Objection. If the Appeal’s officer dismisses the objection, the taxpayer can appeal to the Tax Court of Canada .
2. Payment Arrangements
If there are outstanding tax debts, a taxpayer can attempt to enter into a payment arrangement with a CRA tax collector. This can be done with or without the assistance of legal counsel. The CRA tax collector will usually take into account the taxpayer’s personal circumstances when making payment arrangements. However, interest on the CRA debt continues to run even when a payment arrangement is entered.
3. Voluntary Disclosure Program
Taxpayers can make on a named or no-name basis, a voluntary disclosure provided the following criteria are met:
(a)Voluntary – the taxpayer must not be aware or have knowledge of any CRA collection or audit action;
(b) Complete – the taxpayer must provide full and accurate facts for the tax year or reporting period where the inaccuracies exist;
(c) Penalty – the disclosure must involve the application of a penalty (e.g. a late filing fee); and
(d) One year past due – the disclosure must be at least one year past due (this is usually strictly app
If accepted by CRA, the taxpayer will be not be charged any penalties and may receive partial interest relief. If the CRA officer’s reasons are unjustified or unreasonable, the taxpayer has the ability to pursue a review of the CRA officer’s decision in Federal Court by way of judicial review .
4. Request for Taxpayer Relief
In some cases, CRA will forgive a taxpayer from interest in penalties where the following exist:
(a) extraordinary circumstances;
(b) actions of the CRA;
(c) inability to pay or financial hardship; and
(d) other circumstances which do not fall into the above-enumerated categories.
There are a number of factual circumstances and factors which may warrant CRA to cancel or forgive interest or penalties. These are detailed in Information Circular IC07-1 (Taxpayer Relief Provisions) .
5. Remission Order
As a last-ditch effort, and when a taxpayer has exhausted all other avenues for relief, taxpayers can apply for a Remission Order to forgive or refund taxes, interest, penalties. A Remission Order is made under section 23 of the Financial Administration Act and is carried out by the Federal Government. The sort of matters a remission order may cover include:
• unintended results of the legislation;
• financial setback coupled with extenuating factors;
• incorrect action or advice by CRA officials; and
• extreme hardship.
Again, these tend to be fact specific reasons why relief should or should not be sought. If the taxpayer is unsuccessful they can seek judicial review of the decision in Federal Court.
In conclusion, there are a number of avenues for tax relief that a taxpayer should explore when dealing with an audit, tax assessment or tax debts. Although, depending on a taxpayer’s personal circumstances, the only realistic option might be to make an assignment into bankruptcy or a proposal under the provisions of the Bankruptcy and Insolvency Act. Even for strategic reasons, it may make sense to reduce a taxpayer’s tax liabilities as much as possible to allow the argument at the taxpayer’s bankruptcy discharge hearing that the bankruptcy is not strictly “tax driven”.
 ReAnh Thi Dinh, 2017 YKSC (Yukon Supreme Court) , at para 27 to 32 (link to decision: http://www.yukoncourts.ca/judgements/supreme/2007/2017_yksc_24_re_anh_thi_dinh.pdf)