Episode 23: When You Owe Canada Revenue Agency Money
Welcome back to another episode of Chat with Brandy, a weekly show where we talk personal & business finance, taxes, and how to make money while doing what you love! I’m your host, bookkeeper and tax preparer Brandy Miron, and this is episode 23.
This is something that a lot of us will face at some point in our lives, either on the personal or business side. You're not alone, so try to put the shame away - Chat with Brandy is a judgement free zone! I want to cover a basic overview of how to avoid this trouble, or how to manage the situation once you’re in it.
First things first, let’s talk about the types of debt that you might owe Canada Revenue Agency:
· Individual income tax including sole proprietor tax
· Benefit overpayments including:
· Canada child benefit
· GST/HST credit
· Provincial benefits such as Alberta Carbon Levy Rebate, AB Family Allowance, etc.
· Payroll source deductions
· GST remittances
· Corporation income tax
· Customs, excise, and other levies
Also, if you owe money to another government department that isn’t CRA, and you have a tax refund owing to you, CRA can use that refund towards the debt – for example:
Defaulted Canada Student Loans
Employment Insurance overpayments and penalties
Training Allowances Payment System overpayments
Canada Pension Plan overpayments
Grants and contributions overpayments
Operations and maintenance receivables
Overdue traffic fines
Of course, paying any debt in full is the best way to avoid interest and legal or financial consequences. There are several payment options here to pay CRA debts. Other government program debts can be paid via online banking.
If you’re watching this video, chances are that the option to pay in full is not possible. My best advice to you is to contact CRA before they contact you. Hiding from the debt unfortunately isn’t an option and CRA is much more likely to be willing to work with you on a payment arrangement if you take action first.
Your debt will continue to accrue interest (right now it’s 6%, but this changes every quarter), but if there’s an arrangement in place, CRA will stop collection activity (which we’ll chat more about later).
Before you make a payment arrangement, you may need to show that you have tried to pay your debt in full by borrowing money or reducing your expenses. To figure out your ability to pay, CRA may ask you to provide proof of your income, expenses, assets, and liabilities. You may have to do this by telephone or by completing a financial questionnaire.
The Payment Arrangement Calculator lets you calculate payment options and it includes the prescribed Canada Revenue Agency interest rates. The Income and Expense Worksheet will help you to calculate your available net income to pay your debt.
You can contact CRA to make an arrangement through CRA My Account, or by calling in to your tax centre.
Now, there are also circumstances where your penalties or interest may be waived if you are in a financial hardship situation. The parameters around this vary between businesses and individuals, but know that it may be an option if your interest or penalties is a significant part of your debt. Feel free to reach out to me if you have more questions on that.
If you’re in a situation where you haven’t filed yet but you know you’ll owe once you do, OR you have filed but you know it needs to be corrected, there is a program called the Voluntary Disclosures Program (VDP) which wouldn’t relieve you from the actual tax or interest payable, but in some cases, it could relieve you from any penalties or legal issues that may arise if you go outside of this program. Generally, the application must show that the non-compliance was unintentional or involuntary.
Let’s talk about collection activity and the consequences that can come up when ignoring debt with CRA. As you may know, the CRA has teeth and will use them if they feel you are not cooperating. Unfortunately, once some of these proceedings have begun, they are not usually withdrawn until your debt is paid in full or you can show that the action is causing undue hardship.
Interest accruing daily – we’ve already talked about this, but this is the base level for all debts with CRA – the amount you owe will compound with interest, even if you’re paying it off in installments.
Refund Set-Off Program – As I mentioned before, if you owe CRA any tax debts or other government programs, and you are due a refund or GST credit from them, they will actually use that refund or credit against the debt. Child Tax Benefit will not be used against the debt UNLESS the actual debt is with the Child Tax Benefit department.
Garnishment – the CRA can issue a garnishment to your employer or any third party that owes you money. So if you are a contractor for a business, CRA can intercept the funds that party owes you by sending them a Requirement to Pay notice to redirect the funds to them. This also includes freezing your bank account and taking funds directly out.
CRA can legally register your debt with the Federal Court of Canada, which is essentially a judgement against you. This means they can get a writ and seize/ultimately sell your assets and property (car, boat, personal residence, property, business property).
In the cases of a corporation, certain corporate debts can be transferred to a director – GST and payroll source deductions are the 2 main ones there – so if your corporation owes GST or payroll deductions, and you think that you can just close the corporation and walk away, you’re unfortunately wrong. Directors can and will be held responsible for those types of debts. GST and Payroll Deductions are considered ‘trust funds’ so this means the money was never the business’s to begin with – you were just holding that money in trust for the government. This is why they will not let up on these types of debts.
If payment arrangements are not enough or not possible, or this type of collection activity has already started for you, my next recommendation would be to look into insolvency either for yourself or your business. I do have a couple of different trustees that I would recommend based on whether you are an individual or a corporation, so if that’s your situation, please feel free to reach out to me, completely judgement and shame free and we can work together to resolve what is happening.
Obviously, avoiding debt in the first place is the best case scenario, for which I would recommend forecasting and budgeting for, particularly business. When you’re an employee, it’s easy to save for taxes since your employer should be remitting them on your behalf. When you’re self-employed, things can get a little trickier and I’ve personally seen plenty of people in trouble at tax time because they didn’t save any of their profits for taxes. So the first thing you should know is YOU’RE NOT ALONE. You’re not the first person to make this mistake and you won’t be the last, but also – I am here for you. We will work on a budget together to maximize the amount of profit you keep in your pocket and making sure that you’re saving an appropriate amount for tax time.
Later in the season, I will have the honor of bringing on 1 of the smartest ladies I know when it comes to debt and finance and insolvency and she’s going to be here to answer more questions about debt load and the consumer proposal/bankruptcy route so stay tuned for that.
I know this was a bit of a dark topic, but information is power and I hope that I encouraged you to stop avoiding and stop ignoring and start to deal with it because I know that is the beginning of the best possible outcome for you.
And because i hate leaving you on a low note, I have an exciting announcement for next week - I am bringing on my first guest of the season,my business coach and mentor Dawn Taylor of The Taylor Way. I am very excited because she's so amazing! She'll be here to talk to you about time and stress management. I STRONGLY encourage you to tune in and. take advantage of this FREE training she will be providing because the tips she'll be sharing helped me so much and i know they can help you as well.
That’s it for this episode, thanks so much for tuning in, and we’ll see you next week!