FAQ

Outstanding Income Tax Debt

How Do I Deal With My Outstanding
Income Tax Debt?

The options available to you depend very much on your financial situation, the type of tax liability and the amount of tax liability.
There are several types of tax debt which are outlined as followsPeople can owe money for taxes relating to:

1. Debts from personal income taxes
2. Unremitted GST that has been collected for Canada Customs and Revenue Agency (“Canada Customs and Revenue Agency”)
3. Unremitted source deductions for employees that worked directly for you, and/or
4. Liabilities for GST and Source Deductions as a Director of a corporation.If the amount of tax debt is not significant, you may be able to talk to Canada Revenue Agency and arrange payment terms. The payment terms will include interest and penalties on the late payments unless Canada Revenue Agency agrees to write off the interest and penalties owing through its Fairness Legislation.

If most of the amount owing relates to interest and penalties and if the debtor would be forced to consider bankruptcy because of the interest and penalties, it is possible to make a request to Canada Revenue Agency to waive the interest and penalties under the fairness package. Please note that there are no guarantees that Canada Revenue Agency will agree to waive interest and penalties and there is nothing to stop Canada Revenue Agency from acting against your assets and income while they are considering your application under the fairness package.

Canada Revenue Agency treats the amount that was deducted from your employees as a trust fund. They will claim a first position against all your assets for this portion of your debt. Their trust claim will defeat all your creditors except mortgage security. If they file a Writ against your property before you have protection under the Bankruptcy and Insolvency Act there is a risk that any equity above your exemption will be lost. If you have large unpaid employee source deductions for your employees, you should discuss your exposure on this trust liability with an insolvency lawyer.

If the amount that is owed to Canada Revenue Agency is significant, you may wish to consider protection under the Bankruptcy and Insolvency Act.

The first option that you should consider if you have significant income, significant debt to Canada Revenue Agency or if you have previously filed bankruptcy is to file a proposal. The proposal would have to provide for any unpaid employee trust liability, including interest and penalties, within six months. The remainder can be made by payments as long a period as five years.

The proposal is the starting point for negotiation with your creditors. If your creditors want more from you to settle their debts, the initial proposal can be amended as filed if you agree to amend it. If you believe that the creditors demands are not realistic, you do not have to amend your proposal and the creditors have to vote on it as filed.

If the amount that you owe Canada Revenue Agency plus any other debts that you have, excluding your residential mortgage, exceeds $75,000 failure of the proposal would result in an automatic bankruptcy. We believe a bankruptcy resulting from a failed proposal is easier for you to defend because it shows that you tried to avoid bankruptcy but were unable to do so when the proposal failed. If Canada Revenue Agency were to object to the discharge from bankruptcy from a failed proposal, the Court will consider that the proposal was filed in deciding what if any conditions should be placed on your release from bankruptcy.

If the amount of unpaid monies to Canada Revenue Agency is so significant that it is impossible for you to file a meaningful proposal, you may wish to proceed directly to an assignment into bankruptcy. You run the risk of a challenge to your discharge by Canada Revenue Agency but the Court will have to review your income, your history and your ability to repay the loans.