A Consumer Proposal (up to $250,000 in debt) or Division 1 Proposal (over $250,000 in debt) are the only possible methods to get Canada Revenue Agency (CRA) to agree to a tax debt settlement and accept less than the full amount owing. An assignment in Bankruptcy will also eliminate taxes owing to CRA.
It is important that you consult with an insolvency professional before taking action. A knowledgeable professional will be able to assist you and advise you on the best course of action. With the help of an Insolvency Professional, you can learn more about the options that are available to you and figure out which option is the best for your situation.
Outstanding income taxes, HST, PST, GST and payroll taxes can rapidly become very expensive (because of penalties and interest) and the longer you wait to pay them, the more expensive it can get. Some people avoid filing or attempting to pay their taxes because they are overwhelmed by the amount of debt. This can result in a number of problems. Revenue Canada can seize your assets, garnish your wages, freeze your bank accounts or register liens against your property if they are owed taxes. This means you cannot stay away from the problem.
If you are in this position, you need to realistically consider if and how you will be able to pay these debts. Keep in mind that, if you haven’t paid your taxes on time, penalties and interest charges could apply and grow. These can make it even more complicated to pay back what you owe. So what should you do?
Dealing with Tax Debt by Filing a Proposal
A Consumer Proposal is the only Federal Government tax relief program that offers taxpayer tax relief and under which CRA will settle your tax debts for less than the full amount owing. The "arrangement" must be better than what they would receive if you were to file an assigning in bankruptcy protection.
In order for CRA to accept a tax debt reduction through your consumer proposal, the proposal must include the following conditions:
- All tax returns must be filed and up to date prior to the filing of the consumer proposal.
- All tax returns due during the proposal period must be filed when due.
- All taxes outstanding during the proposal period must be paid as they become due (the consumer proposal will only include taxes owing prior to the proposal date).
- In the event that taxes for prior years are re-assessed and a refund is due, that refund must first be applied to Revenue Canada's outstanding indebtedness.
Dealing with Tax Debt by Filing an
Assignment in Bankruptcy
In some cases, individuals cash in RRSPs in order to pay their tax debts. This may not be the best choice. In fact, for most people, cashing in RRSPs in order to deal with tax debt is the wrong decision. Why?
Under a bankruptcy, you can protect your RRSP. Except for contributions made in the last 12 months, you won’t lose the money in your RRSP if you declare bankruptcy protection.
If you are not able to make an acceptable proposal to deal with your tax debt or other debts, filing an assignment in bankruptcy might be your best way to eliminate your tax debts. Income tax, HST, PST, GST and payroll taxes debt can be incorporated in a bankruptcy and are generally eliminated upon your discharge.
It is very important to file for protection before CRA register as a secured creditor (take a lien) against your home or other real property. They must however have taken appropriate steps to attempt to collect on your tax debts prior to the date of your bankruptcy for these special privileges to apply.
If you owe Revenue Canada more than $200,000 for personal income tax and this amount represents 75% or more of your unsecured debts you will not be eligible for an automatic discharge and will have additional duties to perform before the completion of your bankruptcy.
What Do I Do Now?
We recommend that you ask an Insolvency Professional to review your situation for advice. Take advantage of our free initial consultation. We will analyze all the circumstances of your case, advise you about each of your options, and then you can decide which will be the best course of action to take.
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