Seeking Tax Debt Forgiveness from the CRA? Consider These Tax Forgiveness Programs
Amassing tax debt is a situation that can happen all too easily. Penalties and interest on taxes owing can accrue very quickly for late filing, repeated failure to report income, and making false statements or omissions on one’s tax return.
There are ways to be granted obtain tax debt relief, however. Canadian tax statutes generally do not provide the CRA with discretion to waive tax on compassionate grounds, outside of a timely objection or adjustment to a return. However, income tax and HST legislation allow the government the discretion to waive interest and penalties, and some other legislation can provide relief from principal taxes.
The Taxpayer Relief Program
A series of provisions under the Income Tax Act allow the CRA to depart from the default rules that apply to tax assessment and reassessment. These rules are referred to together as the Taxpayer Relief Provisions. The term “taxpayer relief” can also refer to one specific provision that allows the CRA to waive (not charge initially) or cancel (remove retroactively) any interest or penalties payable under the legislation. There are similar programs under HST legislation
The taxpayer relief program is primarily available where circumstances have prevented individuals from filing or paying taxes on time because of extenuating circumstances. Examples of these types of circumstances include natural disasters or a serious medical condition suffered by the taxpayer or his/her loved one.
Financial circumstances can also justify relief, particularly when combined with circumstances outside of the taxpayer’s control. If the CRA enforced the tax debt including interest and penalties, the taxpayer would only be subjected to such a large tax bill that he could never recover.
Finally, sometimes tax debt will balloon because of CRA error or inaction. CRA is typically quite generous in waiving interest or penalties where there is a delay in resolving objections or appeals.
In all cases above, the taxpayer can hope for debt forgiveness through the provisions of the Taxpayer Relief Program. Although the principal tax debt will not be reduced, in consideration of a Taxpayer Relief Application, the CRA may reduce or remove the interest and penalties altogether, depending on one’s specific circumstances.
The CRA can only grant relief for ten calendar years prior to the year in which the request is made.
The Voluntary Disclosure Program
The Voluntary Disclosure Program generally does not apply where a taxpayer does not have an outstanding debt to forgive. Rather, it allows taxpayers to address issues, including outstanding returns and errors in returns, proactively. In exchange, if you address all outstanding issues before the CRA notices them, the CRA will provide partial relief from interest and penalties. The program operates under the same legal authority as the Taxpayer Relief program. Typically, CRA only allows the taxpayer a single use of the voluntary disclosure program in their lifetime.
This program is designed for those who file previously unreported income or to disclose inaccurate or incomplete information on a previously filed return. It is often used by taxpayers who have under-reported their income or claim expenses that they later discovered they were not eligible for. It also used to disclose foreign assets that were left off the relevant forms.
To qualify for relief through the Voluntary Disclosure Program, the application must be voluntary (i.e., CRA did not get there first), complete (i.e., address all outstanding issues), involve the potential application of a penalty, and relate to information that was due at least a year ago (although if this is present, the taxpayer may also disclose information less than a year ago under the program). Taxpayers also need to estimate the tax that would be payable and include payment for that amount, or request that the collections division contact them
Following a valid disclosure, the CRA will agree not to pursue criminal prosecution, and will agree not to assess penalties involving intent or gross negligence. In some circumstances, the CRA will provide additional relief under the “General Program”, in which case the Agency will halve interest for years preceding the three most recent years and will waive all other penalties.
Remission orders are not provided under tax legislation, but rather under the Financial Administration Act. The CRA manages requests for remission orders on behalf of the Governor in Council. These are highly unusual and highly discretionary, providing the government with the authority to cancel or return any taxes, interest or penalties.
These will only be granted in truly exceptional, but in some cases, taxpayers may be able to take advantage of these orders to address tax debts that other programs cannot.
Where taxpayers are overwhelmed by tax, whether or not it includes interest and/or penalties, their only option may be to file for bankruptcy, and potentially make a consumer proposal, under the Bankruptcy and Insolvency Act.
This is handled through an insolvency trustee, although bankruptcy lawyers can provide advice to the bankrupt throughout this process.
Tax debts can be discharged through bankruptcy, although bankruptcy legislation does treat them differently in some circumstances. However, because tax legislation contains tools that the CRA may use to collect tax debts from third parties, notwithstanding the original taxpayer’s insolvency, bankruptcy does not always end the tax collection process.
Consult a tax lawyer at Kalfa Law to find out how you can best manage your tax debt, especially one that has ballooned out of your control.
-James Alvarez, Tax Counsel
© Kalfa Law 2020