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Feeds
How to Deal with Tax Debt
Are you at the stage where you are ready to deal with tax debt? If so, you’re in a good place, even though it probably doesn’t feel like that. Some people take months to be prepared to face tax debt, while others bury their heads in the sand and refuse to deal with it. Now you are ready to understand how to deal with tax debt, this article will take you through the process and options.
Tax Debt
What is tax debt? Tax debt is the amount of money that you owe in taxes, often called back taxes. It could be Federal and Provincial tax you owe from income, self-employment, director liability, investments, or capital gains. You will probably have to pay interest on the tax debt, which will increase the amount you owe. As you will see, dealing with the issue sooner means that you can reduce the amount of interest being accumulated.
How much tax do you owe?
If your tax debt feels unmanageable it is wise to work with a Licensed Insolvency Trustee (LIT) to discuss your options. A big part of this is, obviously, understanding how much you owe, as well as the interest and penalties involved. Your LIT will help you explore your options and discuss all possible solutions. In paying back your tax debt you need to look at other factors such as; your income, other debt obligations, assets, your age, dependents you’re responsible for, and your health.
Back Tax Options
Obviously one of the best options is to pay an amount you can afford each month. This means you need to try to negotiate a payment schedule with CRA. However, it is important to consider if you can reasonably afford these payments without dipping into funds you may need for the following year’s taxes as this will just land you in a cycle of CRA debt. It is also important to look at the monthly interest vs your monthly payment to ensure the amount you have decided to pay will actually reduce your debt. If payment is an option consider displaying good faith by giving a series of post-dated cheques. If during the repayment period you cannot make a payment, you must contact the Canada Revenue Agency or your representative immediately and let them know. Note that the CRA will not normally accept a payment plan that is longer than 12 months. To explore this option, make contact your income tax collections officer and ask for a meeting or phone appointment.
Ahead of time, prepare notes with the points you want to make and figures you need to discuss. When you have explained your situation, they may suggest a payment option. Remain aware that what you owe in back tax will be subject to interest until your debt is paid in full. There is a chance that the CRA may not accept your plan and may decide to take action to collect your tax debt. It’s important that you have a plan B set aside such as discussing your options with a Licensed Insolvency Trustee.l.
Apply for a Loan to Pay off Your Back Tax
If the CRA rejects your first proposal or if you want to pay off your back tax debt as quickly as possible, you can discuss the pros and cons of applying for a loan vs a proposal or a bankrupcy with your LIT. One of the benefits is that the term of the loan can be for more than a year and the repayment terms may better suit your financial circumstances or have a lowe interest rate. However, depending on the amount and the financer you could need a co-signer for the loan. The cons of a loan include job loss or some other event which prevents you from paying it back. Defaulting on a loan will mean that they could pursue the co-signer and the bank could also seek to repossess your assets or foreclose on your home’s mortgage if you have given collateral. Thus it you close a loan as your option you want to make sure it is something you can afford in the long term.
File a Consumer Proposal
A consumer proposal can stop any garnishing of wages from your bank account and also lift a freeze on your account if one has been placed on it by CRA. A consumer proposal can discharge unsecured personal income tax debts, GST obligations, and payroll deductions. The CRA may request that all your outstanding income tax returns are filed before they will accept your consumer proposal.
File for Personal Bankruptcy
It’s important that you don’t make a rushed decision about bankruptcy and discuss the pros and cons with your LIT. You should also compare the benefits of bankruptcy with the benefits of a consumer proposal, and your LIT will be able to guide on the best option for you.
When someone files for bankruptcy, their assets are assigned to a trustee for the benefit of their creditors. However, there are many assets that the government deems exempt and your trustee can . Have a full and detailed discussion about the process and how you can pay back tax with your Licensed Insolvency Trustee. You need to understand how filing for bankruptcy will impact your own personal situation and what your solutions are.
Implications of Bankruptcy on Back Tax
If your personal income tax debt is in excess of $200,000 and that debt represents more than 75% of the proven unsecured claims in your bankruptcy estate, then a formal discharge hearing must be held before the Registrar in Bankruptcy. A Registrar has the powers of a judge in bankruptcy matters. The Registrar would determine appropriate terms of discharge, if any, for your bankruptcy.
There is the possibility that the CRA could oppose your discharge from bankruptcy. They could request that you pay additional funds to your creditors if they believe it is prudent. If this occurs, a formal hearing will be held before the Registrar in Bankruptcy who will review your situation and set appropriate terms of discharge. The Registrar will consider factors such as back tax payment history, your income and age, along with your family situation.
For more information about how to deal with your tax debt, call Kevin Thatcher at 1-866-719-8547 or contact us here.