The Taxpayer Relief Program: What Is It and How Can It Help Me Reduce My Taxes?
Sometimes we find ourselves with a ballooning tax debt that is careening out of control. As much as we try to stay ahead of our tax obligations, we just can’t catch up. Each month, the interest on back taxes gets higher and the penalties get more aggressive.
Is there anything that you can do?
There are means to reduce or eliminate the penalties and interest that have been levied, enabling the taxpayer to pay the principal balance only. This can be achieved through a Taxpayer Relief Application.
In order to qualify for the taxpayer relief program, however, one must demonstrate that there are extenuating circumstances that have hampered his ability to pay. The CRA will generally allow applications that fall under one of three categories, although other circustances are considered:
- Extraordinary circumstances such as a fire, flood, illness or death in the family.
- Financial inability to pay the CRA debt;
- CRA in action or inaction;
- Extenuating circumstance beyond one’s control
Extenuating circumstances beyond the control of the taxpayer include circumstances where either the taxpayer or a family member contracts a serious medical condition or where a taxpayer or family member suffers from a natural disaster, unusual event or occurrence. Basically, an extenuating circumstance is something that may occur in your life that will prevent you from being able to properly tend to your tax matters.
Let’s look at an example of what constitutes “extenuating circumstances”:
John has been diagnosed with a life-threatening illness. He is in treatment and is devoting all his energy, time, and resources to fighting the disease. He fails to file a tax return and many months go by. The taxes he owes remain outstanding in addition to six percent compounded daily interest and penalties, which begin to pile on. What was once a $10,000 tax debt has now ballooned to many tens of thousands of dollars.
What can John do?
- Financial inability to pay
Financial inability to pay looks at the financial circumstances of the taxpayer. If an individual is living paycheck to paycheck and is barely able to afford the roof over his head, the CRA will relieve some of the interest and penalties that were levied, so as not to otherwise bankrupt a taxpayer.
The following illustrates the condition of financial inability to pay:
Wendy is a single mother of three children who owned a flower shop for ten years. She decided to close her business when it became clear that it wasn’t making enough money to make it worthwhile. Wendy now works at two jobs for a total of 15 hours a day just to make ends meet. She has barely $50.00 left in her bank account at the end of a month.
Wendy receives a notice of assessment from the CRA, which indicates that Wendy owes $15,000 in corporate taxes. Unfortunately, Wendy had failed to put enough away each month to cover her corporate tax obligation. Wendy doesn’t know what to do so she ignores the problem, hoping that it will go away.
In the meantime, Wendy’s tax debt gets bigger, and interest and penalties begin to accrue. After years of neglect, Wendy is notified that she owes $65,000 to the CRA.
If the CRA pressed ahead, Wendy would be destitute. She would not be able to pay rent and she and her children would be forced to live in a shelter.
What recourse does Wendy have?
- CRA’s action or inaction
A CRA action or inaction condition takes place when a taxpayer’s ballooning interest and penalties are a consequence of something the CRA did or did not do.
Let’s look at an example of how the CRA’s action or inaction may cause this to occur:
Cindy was married to Bob, her husband of twenty years, when he died suddenly of a heart attack. At the time of Bob’s death, he owed the CRA $35,000 in taxes. Cindy was not apprised of her husband’s finances and consequently did not know about Bob’s tax debt. Although Cindy was her husband’s executor, the CRA failed to notify her of Bob’s outstanding tax debt at the time of his death. Seven years go by and, out of the blue, Cindy gets a letter from the CRA letting her know that she owes $95,000 in taxes: this includes Bob’s original tax debt plus compounded interest and penalties, which accrued over the 7 years since Bob’s death.
Had the CRA made Cindy aware of the $35,000 at the time of Bob’s death, she would have paid the entire amount from his estate. But because the CRA failed to send a letter to Cindy at the time of his death and then for an additional 7 years, it is entirely the result of the CRA inaction that caused Cindy to suffer $65,000 in interest and penalties.
What should Cindy do?
In all the above cases, a tax lawyer can file for taxpayer relief on behalf of the taxpayer. 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 Voluntary Disclosure Program
The CRA Taxpayer Relief Program is very different from the CRA Voluntary Disclosure Program. While both involve the taxpayer’s seeking relief from interest and penalties from back taxes, the two should not be confused.
In short, a voluntary disclosure is sought when a taxpayer either fails to file a return or misreports what he owes, either intentionally or unintentionally. The CRA’s Voluntary Disclosure Program was set up to encourage individuals in this situation to come forward voluntarily before the CRA does an audit and discovers the omission or error. Under this program, the taxpayer seeks relief from prosecution, interest and penalties, but not from having to pay the principal taxes.
Bankruptcy & Consumer Proposal
Sometimes, even after reducing or eliminating the amount of interest and penalties through the taxpayer relief program, you find yourself unable to pay the principal tax debt. In that case, you have the option of filling for bankruptcy or a consumer proposal under the Bankruptcy & Insolvency Act.
A bankruptcy trustee can file a consumer proposal on your behalf. The trustee will send the CRA a proposal asking them to accept less than the full amount owing with a payment plan put in place.
Filing for a consumer proposal or bankruptcy will halt the collection of interest and the application of penalties, including wage garnishments, frozen bank accounts, the withholding of HST/GST and child tax credits, and property liens.
In the case of a consumer proposal, a payment plan with the CRA can be negotiated. If you choose to file for bankruptcy, most tax debt is treated as other unsecured debt and can be eliminated.
A consumer proposal or bankruptcy is a good solution when you just have no other way to meet your principal tax obligations, but it is one that comes with its own costs. One should be aware that a proposal or bankruptcy is a matter of public record, is on your credit report, and will negatively impact your credit score for many years: 6-7 years in the case of a consumer proposal and up to 10 years in the case of a bankruptcy.
Given the disadvantages of filing for bankruptcy or a consumer proposal, it is always advisable to file a Taxpayer Relief Application to remove interest and penalties on your tax debt, if you are able pay the principal amount of tax.
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. We can also help you find the best tax plan for you and your business to ensure that you pay as little in tax as possible that you stay at arms length of the CRA’s more aggressive measures.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law 2019