Tax debt occurs where one is unable to pay their annual income taxes, penalties or interest. Often, it occurs as a result of being reassessed for more taxes than one believes they owe. As a result, the taxpayer is indebted to the CRA.
Enforcement Powers of the CRA
The CRA has far reaching powers. If you owe tax to the CRA, a collection officer will be assigned who has the discretion to apply harsh collection measures, including garnishment of your wages and bank account; placing a lien on your home; seizing physical property; offsetting your other government benefits; redirecting funds that are owed to you through a Requirement to Pay (RTP); or holding a third party liable for your tax debt such as a family member to whom you transferred money. The CRA will also charge you interest on the unpaid amounts, compounded daily. Currently, the interest levied is in accordance with the prescribed rate of 5%.
Why you Need a Tax Debt Lawyer
If your bank account has been frozen, your wages garnished or your assets seized, you need a strong tax debt lawyer to defend your interests against the CRA. At Kalfa Law, our tax debt lawyers contact the CRA on your behalf and negotiate the removal of the garnishment or seizure in exchange for a voluntary payment plan arrangement through the Voluntary Disclosure Program.
If it appears that your combined debt is greater than your ability to pay, our tax debt lawyers can contemplate bankruptcy or a consumer proposal. If this is the most suitable option for you, these avenues can remove all or a good portion of your CRA debt.
You will be charged compounded daily interest according to the prescribed interest rate for any unpaid amounts of tax, in addition to interest on penalties. on any overdue taxes or balance owing starting May 1st for the preceding tax year. Interest is charged on tax penalties from the day after your tax return is due.
The exact amount of interest charged can change every quarter and the CRA maintains an updated list which can be found at the following Canada Revenue Agency web page: http://www.cra-arc.gc.ca/tx/fq/ntrst_rts/menu-eng.html .
The CRA continues to charge compound daily interest on any owed balance from previous years until repaid even if there are new tax penalties or owed balances with interest accruing from more recent years.
The late filing penalty for filing a return after the due date is 5% of the balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 month. If within the past three tax years the CRA imposed a penalty for late tax filing and you once again file your tax return after the deadline, the penalty can rise to 10% of the total balance plus 2% of the total balance per full month that the tax return is late up to a maximum of 20 months.
The CRA can waive or reduce penalties for late filing if circumstances beyond the taxpayer’s control lead to filing after the deadline. In order to request a tax waiver or a tax reduction, you must complete form RC4288, Request for Taxpayer Relief, and send it to the tax centre that corresponds to you. See “Where do I send my RC4288, Request for Taxpayer Relief?” for details.
The penalty for repeated failure to report income is equal to the lesser of 10% of the amount you failed to report or 50% of the difference between the understated tax and the amount of tax withheld related to the amount that was not reported.
The penalty for making a false statement is equal to the greater of $100 or 50% of the understated tax and/or overstated credits related to the false statement or omission.
After a taxpayer files an income tax return, the CRA may follow up with a request for more information as part of a pre-assessment review. Pre-assessment reviews usually ask for more information about the deductions or credits that were claimed.
Following a review of a taxpayer’s tax return, the CRA will issue a Notice of Assessment, which will provide information about how much the taxpayer owes in taxes or how much refund a taxpayer is entitled to.
A Notice of Assessment will provide the following information:
- Refund or balanced owing
- Total Household Income
- Corrections if any to your GST/HST rebate application
- Your RRSP deduction limit, representing the maximum amount that you can contribute to your RRSP.
- Repayment required if you benefited from the Home Buyer’s Plan tax deduction and withdrawn money from your RRSP
- Tuition, education and textbook carry forward amounts if you are a student and did not use the full tuition, education, and textbook deductions.
- Unused net Capital Losses, which can be carried back three years or carried forward indefinitely to be applied against your capital gains
- TFSA contributions, withdrawals, and any unused contribution room that you have in your tax free savings account.
If you filed your tax return on time, it can take several weeks to receive your Notice of Assessment. If you filed late, then it will take considerably longer. If you want to access your NOA more quickly, you can set up an online account through the MY Account section of the CRA will allow you to download your assessment or review it at your convenience.
If you disagree with a Notice of Assessment, you can dispute it by filing a Notice of Objection within 90 days from the date of the Assessment. In your Notice of Objection, you will provide the reasons for your objection and the evidence and supporting documentation to substantiate the reasons for your objection.
If you realized that you filed your tax return incorrectly, you can file a T1 adjustment. It may take several months before your T1 adjustment is processed. An adjustment request allows you to amend any errors or omissions that you may have made on your tax return.
If you disputed your Notice of Assessment and filed a Notice of Objection, it can take several months for an appeals officer to be assigned to your case.
If you were successful in filing a Notice of Objection, in which you disputed the CRA’s conclusions with respect to its initial Notice of Assessment, the CRA will issue a Notice of Reassessment, reflecting its new conclusions with respect to your tax obligations and possible refund. If the CRA disagrees with your objection, as outlined in your Notice of Objection, it will send you confirmation of the original Notice of Assessment.
A Notice of Reassessment can also be generated as part of a random review particularly when the CRA suspects fraud. In that case, the CRA may go back three years or more to ask for more information. Your income tax and benefit return may be selected for review for a number of reasons, including
- Your compliance history;
- The types of deductions you claimed
- The information on your return does not match information from third party sources such as T4slips.
If you continue to disagree with the CRA’s Notice of Reassessment, you have a right of appeal to the Tax Court of Canada, which must be filed within 90 days from the date of the CRA’s decision.
While a request for information is often mistaken for an audit, it is not. It is simply a request by the CRA for more information about something you included in your tax return. Common information requests are for items such as home office expense claims, medical expenses, and tuition receipts.
You can apply for the Voluntary Disclosure Program if you haven’t yet been contacted by the CRA requesting for more information regarding the income that was not reported.
The Voluntary Disclosures Program (VDP) gives you a second chance to change an incorrect tax return you previously filed, or to file a return that you failed to file. The Voluntary Disclosure Program allows you to apply to the CRA to ask for relief of prosecution, interest, and penalties relating to your omission.
Essentially, the program allows you to come forward on your own to inform the CRA that you may have omitted income in your previous return or you may have omitted that you own foreign property or assets, without being levied with severe penalties
To qualify for relief, the application must be voluntary and be complete. Under the new VDP rules effective March 1, 2018, the disclosure must also accompany payment of the estimated tax owing. By “voluntary,” the CRA must not have contacted you regarding the improper filing or failure to disclose. The moment you receive a letter or call from the CRA regarding your failure to file correctly, you are disqualified from the program.
A taxpayer can apply for taxpayer relief from penalties and interest on taxes that are owed if there are extenuating or exceptional circumstances that hindered the taxpayer from paying his/her taxes.
The CRA will look at the following conditions for eligibility:
- CRA action or inaction: Was the reason for not filing due to an error or inaction by the CRA? For example, if a spouse has passed away with tax debt, and the CRA has failed to notify the surviving spouse about the tax debt, this constitutes CRA inaction.
- Financial inability to pay—if a taxpayer has closed his/her business and cannot pay his tax obligations, he may qualify for the Taxpayer Relief Program
- Extraordinary Circumstances, such a fire, flood, illness, or death in the family.
Form RC4288, Request for Taxpayer Relief, must be sent to a Canada Revenue Agency Tax Centre, and the exact tax services office depends on where the taxpayer resides. Taxpayers may submit their request to have interest or penalties waived or cancelled in writing with the tax center or tax services office where the tax return was filed or by filling out Form RC4288, Request for Taxpayer Relief, which can be found at www.cra-arc.gc.ca/formspubs/menu-eng.html or requested at toll-free 1-800-959-2221. Any written request must explain the situation and circumstances surrounding the taxpayer’s inability to pay and this claim must be backed up with supporting documents.
We Can Help
Once you are represented by our tax law firm, the CRA will no longer contact you. In most cases, no further enforcement action will be taken against you. Our tax lawyers negotiate with the CRA directly, cease enforcement action and establish a voluntary payment plan. Our lawyers have the knowledge and experience in handling the CRA’s collection officers and collection practices.
Owe tax to the CRA and suffering from Garnishments? We’re here to help™.