How to Deal with Canada Revenue Agency Collections Predict What s Coming Don t Shoot Yourself in the Foot Come Up With a Realistic Plan 1
Table of Contents Content Page Number Overview 3 Chapter 1: How to predict what s coming Chapter 2: Lowest hanging fruit what will they go after first Chapter 3: Don t shoot yourself in the foot Chapter 4: Section 160 of the Income Tax Act Chapter 5: Coming up with a realistic plan to deal with your tax problem 4-7 8-10 11-13 14-17 18-21 Author Bio 22-23 2
Overview There are usually four stages to tax problems: I know I have a tax problem but CRA doesn t know yet CRA is on to me asking questions CRA has assessed me and believes I owe them money I owe CRA money and can t pay When you have no dispute over the amount of tax, interest and penalties due to CRA, the severity of your tax problem really boils down to your ability to pay. If you have the ability to pay you may still have a problem if you need time to repay. If you do not have the ability to pay, or repay to terms that CRA will accept, then you have a major issue because this guarantees that you will come into contact with CRA collections. You will need to think about how you can appropriately protect your income and assets from CRA. It s natural to want to protect what you have worked hard to build up. Once you suspect you may have an income tax problem you have to be extremely careful so that you do not inadvertently do something that exposes you to greater attack (or even turn a money problem into a criminal charge simply because you do not know) and guard against taking any action that, however morally sound, will put others you care about at risk of CRA attack. CRA and the Federal Government know that desperate people do desperate things (like transfer houses, move funds off shore, etc.) and they have set up laws and procedures to protect CRA by reversing these transactions and punishing the taxpayer. This e-book will help you to predict what may be coming, explain how to not shoot yourself in the foot, and help you establish a realistic plan to solve your tax problem. It is possible to have CRA deal fairly with you if you don t sabotage your own good intentions and know the correct process and procedure to adopt for your case. 3
Chapter 1: How to Predict What s Coming 4
Predicting What s Coming Where taxes are concerned, time is not on your side! Every day that passes both penalties (in many cases) and interest (in all cases) accrue at an alarming rate and CRA s collection efforts get closer to boiling over into your life. Individuals and businesses often get themselves into deeper trouble than they would have been by playing the waiting game, trying to predict what will happen and hoping for a stroke of luck that will solve their problem. Dreaming of CRA losing your file? Forget it. Hoping that next big contract or lottery win will come in time? Be honest with yourself you know the odds are not in your favour. The odds are lower than playing Russian Roulette in the CRA tax debt game there are five rounds in the chamber and only one empty!. If you have failed to declare income, are behind filing returns or have inadvertently committed some kind of fraud, such as accepting money/credits you weren t entitled to (charity schemes), failed to pay over trust monies (HST and payroll taxes), etc it is safe to assume that what is coming is a re-assessment, audit or investigation by CRA... and then increasingly aggressive CRA collection actions. Here are some different scenarios and how they pan out: VDP Application (Voluntary Disclosure Application) a very exact process to come clean. But it needs to be handled perfectly if not it will be rejected quite easily by CRA and blow your one off chance to avoid ugly interest and penalties. VDP Application Decision is made Can you pay in full? If not, file will go to collections Do you qualify for Taxpayer Relief? 5
Assessment, Re-assessment or Audit objection is filed, decision is made and you do not object to the decision. An Objection is filed Decision is made Can you pay in full? If not, file will go to collections Do you qualify for Taxpayer Relief? You Owe a Tax Debt (no dispute with CRA) you simply owe a tax debt and can t pay. File goes to collections Do you qualify for Taxpayer Relief? Stages General Collections - Call Centre Collector is assigned Enforcement Officers act on requests from collectors The moment that your account is transferred to collections, you need to be even more careful than before. From that point on CRA will be deliberately orchestrating everything with a single goal: to find out what you have and what you earn so that they can enforce and collect money from you. Other important points: If your VDP application is rejected, once you file you will be subject to penalties and interest back to the tax years in question. If you have filed an Objection, collection action will be paused. Unless your Objection is 100% accepted by CRA you will be subject to penalties and interest during the entire period your Objection was under review and that can take years, which adds up. 6
If you have made an application for Taxpayer Relief, CRA will continue to collect the full amount that they believe you will owe while your application is under review. 7
Chapter 2: The Lowest Hanging Fruit What will CRA go after first? 8
What will they go after first? Once your account is handed to the collections department, CRA collectors look for the fastest and easiest methods that they can use to collect money from you. From an enforcement action perspective, the lowest hanging fruit for CRA is generally as follows: a) Garnishing your wages or other income b) Freezing your bank account c) Placing a lien on your home d) Seizing other financial assets Let s explore each one of these enforcement measures so that you can understand the role that your asset plays in each one. CRA is different from all other creditors. CRA does not need a court order to take action. They have the power under the Income Tax Act and the Excise Tax Act to move against you and your assets without even a hearing. They do not need to warn you. Garnishing your salary or wages If you are employed by a company where taxes are deducted at the source, CRA may garnish your wages - up to 50% of your net earnings. CRA will simply send a notice to your employer and your employer must immediately comply or CRA can pursue your employer for your tax debt. Garnishing self-employed income If you are self-employed, CRA can garnishee up to 100% of your income. CRA will send demand notices to all of your clients requiring them not to pay you but to send anything owed to you for services provided or goods sold directly to CRA. Garnishing other income If you receive a government pension (or income under another government program) CRA can garnishee it right from the source. 9
Freezing your bank account The name of the CRA form is Requirement to Pay ( RTP ). When an RTP is issued it will be sent to your bank and to you. The form will require the bank to freeze any money you have in any of your accounts (even if it is a joint bank account), hold the funds frozen for a period of time and then release the funds to CRA. If you are thinking CRA does not know where you bank, think again (they often have the interest slips filed by the bank), and if they don t know, CRA simply sends a letter to all the major banks. Placing a lien on your home This is the equivalent of CRA giving themselves a mortgage over your house without your consent! It is a fairly straightforward process for CRA they know your address and they electronically search the public records to see what properties are registered in your name and then obtain a certificate (without notice to you) and place a lien on your property. They can do this without a court order, even if there are other people on title. It is much easier to negotiate with CRA when there is not a property lien in place. All of these can be incredibly embarrassing! Definitely not good for business when all your customers think you are in trouble and they have to do extra paperwork and deal with the CRA. Definitely not good for your employer (and co-workers) to find out you have money and tax problems again more paperwork they will not appreciate. Definitely a difficult conversation when your spouse sees there is a CRA lien on the family home. Definitely a good reason for the bank to call loans, cut off lines of credit, or cancel credit cards when they see you have an RPT. You can avoid this embarrassment by dealing with your tax problems properly. 10
Chapter 3: Don t Shoot Yourself in the Foot 11
Disclosing your Information to CRA The number one way that CRA learns of what taxpayers have that they can go after is from the taxpayer! Yes you! Most people want to live life stress-free and don t set out to land themselves in trouble with CRA. When CRA emerges they don t always go for the jugular immediately. They deploy good cop/bad cop tactics to gather information from you that they can use against you later. You really think you are lucky and have landed a reasonable professional at CRA to work on your case and you start to co-operate. Oops! You just fell into CRA trap #1. The same way that you cannot lie to CRA, you have no obligation to help them learn how to attack you and your assets earlier than the law says you must. Yet every day this happens simply through the taxpayer s own disclosure - and the consequences can be brutal. As soon as CRA initiates contact with you be on guard. The first thing they will do is try to gain disclosure of what you have. Usually they will agree to a short term repayment arrangement with you if you voluntarily complete a Financial Disclosure Statement. This statement will require you to disclose (among other things): Where you work Your earnings Your expenses Where you bank Where you live If you own your home What investments you have and more This is a fishing expedition, and the moment they decide that they no longer want to offer you the payment plan they can proceed to collect the money through the lowest hanging fruit: a garnishment, frozen bank account or property lien. 12
If you are self-employed, they may ask you for a list of your clients if this happens it should be a major red flag. Having to give up this list may seem inevitable but there will be no need if you have properly utilized other steps that are available. If you give up this information it will probably kill your business. If you cannot negotiate a payment plan with CRA without making financial disclosure pause and consider getting professional advice. These dangerous CRA forms are the gateway to CRA being able to take enforcement action against you. Even if the CRA is nice to you it doesn t matter - the agent is a collector with a task and that is to gain your trust and information. Bank Accounts As noted in the previous section, CRA often finds out where you bank because you disclose that information to them, for example, if you send them a payment through your bank account. You may, for the time being, want to consider other methods to make payments to CRA without doing it through your primary chequing account. 13
Chapter 4: Section 160 of the Income Tax Act 14
Transferring assets/accounts/income into the names of spouses, friends and colleagues Your behaviour when dealing with a tax problem will be very important to your opportunity to have a successful outcome. When many people think of protecting assets they do things like transferring their home into their spouse s name or open an account with another person s name on it thinking it will then be safe. Unfortunately, these types of actions can actually cause your spouse, friend or business partner to inherit liability for your tax problem. If you owe (or even potentially owe) money to CRA at the time of the transfer you are likely shooting holes in your feet. Section 160 of the Income Tax Act What is a Section 160 assessment? Section 160 is a powerful, legislative-based collections authority granted to the Canada Revenue Agency. Section 160 is designed to attack transfers of property between non-arm s length parties (e.g. family members). The conditions which trigger a Section 160 assessment are: There must be a transfer of property. The person who transfers the property must have a tax debt owing to CRA at the time of transfer. The value of the property transferred must be greater than the amount given in consideration for the property transfer. The person who transfers the property is either a relative (anyone with whom you are not dealing with at arm s length), a minor, a spouse. 15
Perhaps the most common example of tax debtors falling afoul of section 160 is the taking his/her name off the title of a jointly owned home in an attempt to get out from under CRA collection action. To demonstrate how surreal Section 160 is, let us look at the following scenario which would create tax headaches for an unsuspecting family member: Unintended Consequences Mr. Smith currently owes the Canada Revenue Agency $50,000 from a reassessment he received in July of 2013 regarding his 2010 income tax return. In 2012, Mr. Smith decided to pay for his daughter s wedding and honeymoon a gift worth $75,000. Mr. Smith s daughter was not aware that her father owed the CRA any money. In 2014, during their collection and enforcement action, the CRA discovered this gift. CRA immediately raised a tax assessment against Mr. Smith s daughter for $50,000 the entire amount of his tax debt - under section 160 of the Income Tax Act. Mr. Smith s daughter is now legally responsible for all of her father s tax debt. Some key points to take out of this example: 1. Only tax debts that are incurred *before* the property transfer takes place are subject to Section 160 assessments. Mr. Smith didn t become aware of the tax debt until 2013, which was *after* he paid for his daughter s wedding in 2012. But his daughter is not safe. The tax debt is still considered to have been created *before* the wedding as it relates to his 2010 tax return. 2. Unlike many other provisions under the Income Tax Act, there is no time limit with regard to how long the CRA can wait to issue an assessment under Section 160. 3. The fact that Mr. Smith s daughter was unaware of his tax debt is irrelevant. Due to the mounting pressure for the CRA to collect on unpaid taxes more quickly, Section 160 is becoming a more commonly utilized tool by collectors. As 16
illustrated above, Section 160 is a danger not only to the tax debtor but potentially to their own family! o A really ugly part of CRA s rights under Section 160 is that they bring this weapon into play based only on what they suspect - they don t need a court order to go after both the original tax debtor and the beneficiary of the transfer. Now both their assets are at risk of seizure. Please visit http://laws-lois.justice.gc.ca/eng/acts/i- 3.3/section-160.html to read the complete section of the Act. This means that if you are aware that you have a tax problem and you transfer your assets to someone not at arm s length you are making that person liable for your tax debt! This is why it is important not to have a knee jerk reaction when a tax problem emerges. Once you become aware that a tax problem is coming (or is sprung on you) and understand potential action that could be taken against you, you need to position yourself very carefully to come up with a realistic plan to deal with your tax problem. 17
Chapter 5: Coming up with a Realistic Plan to Deal with Your Tax Problem 18
Coming up with a realistic plan to resolve your tax problem This is easier said than done as resolving a tax problem is often like peeling an onion the way that these problems end is not generally the way they began. Use this table as a very generic guideline to compare your tax problem and what process should likely take place. Scenario CRA doesn t yet know you have a tax problem CRA doesn't yet know you have a tax problem Undeclared income Late returns Incorrect disclosure Solution Voluntary Disclosure Program (VDP) Process By leveraging the VDP process (if approved), CRA will accept your disclosure and you will not have to pay penalties or be subject to prosecution. To qualify under VDP, disclosure must be complete, voluntary, involve a tax year greater than one year and a tax debt that involves some form of penalty. VDP Application Decision is made Can you pay in full? If not, file will go to collections Do you qualify for Taxpayer Relief? 19
Scenario CRA is on to you CRA is on to you Re-assessed returns Notionally assessed returns Audits Demand to file late returns The solution will depend on if you agree with CRA s assessment or not. If you DO NOT agree with CRA s assessment - Filing an Objection: You can file an Objection to the amount of the assessment. The following is the process that follows filing an Objection. An Objection is filed Decision is made You can agree or appeal the decision Can you pay in full? If not, file will go to collections Do you qualify for Taxpayer Relief? If you agree with CRA s assessment but simply don t have the money to pay: If you have a tax problem and know you will not be able to pay in full, then you will have to deal with CRA collections. We highly recommend seeking a professional opinion about your specific tax problem before making contact with CRA. Once you begin dealing with CRA directly, they will ask you for the personal information discussed in this e-book (Chapter 1. above) only to use it against you later. Every tax problem is different and you still have your personal and business situation to take into account, your tax history with CRA and how the specific CRA collector deals with you. These variables significantly increase the importance of a tax 20
professional experienced in these matters to steer you out of the danger zone and to a successful conclusion. Here are a few final tips to consider when dealing with CRA: Don t give them more than you have to - if they haven t asked for it or raised the point, leave it alone. CRA does not give prizes for volunteering. It will simply serve to give CRA further information to use when collecting from you. Be wary about sending in proof of expenses in the form of your bank or line of credit statement you could be serving up your banking information and knowledge about your available credit on a silver platter. When making payments, avoid using the bank account at the same institution that your savings and investments are at. This will likely be the first account that CRA attempts to freeze once your arrangement is no longer good enough for them. Be aware of CRA forms because they are full of dangerous traps where they mine for your information do not complete any disclosure forms from CRA without getting a professional opinion first. They are not innocent documents that are only used to help the CRA agent help you solve your problem. That is what they would like you to think. These forms become evidence against you, sources of further questions, and give CRA insight into your affairs that you cannot afford to give them if you want a fair resolution. Be careful what you say every conversation, everything you say to CRA for that matter, is recorded in a docket. Less is more: saying too much to them now can impact you in the future if you contradict yourself when the time comes to apply for relief or some other program. If they are not on to you yet do not initiate contact. Under the Voluntary Disclosure Program you can avoid prosecution, penalties and interest but disclosure must be voluntary and handled precisely within the rules of the program. If you contact CRA outside of the official VDP application process you kill any chance of resolution under this program. 21
Author Bio James Bell is the Director of Tax Solutions at Tax Solutions Canada. A member of the Farber Financial Group, Tax Solutions Canada is a firm that helps individuals and businesses struggling with tax problems ranging from small matters to the most complex negotiations. Prior to James tenure at Tax Solutions Canada, James worked in increasingly senior roles across many departments at Canada Revenue Agency, including but not limited to: Audit, Investigations, Enforcement and Appeals. Through Tax Solutions Canada, James brings to bear his outstanding technical knowledge, negotiation skills and deep understanding of the CRA processes and mindset to assist individuals and businesses who: Are at risk of being accused of tax evasion Are being notionally assessed by CRA Are dealing with CRA audits and/or investigations Want to file an Objection to an assessment or an audit Want to apply for Taxpayer Relief Want to apply for Voluntary Disclosure Want to negotiate regarding the removal/reduction of enforcement action such as wage garnishments and liens on houses Want to negotiate payment plans and more In addition to working with the public, Tax Solutions Canada also supports accountants, legal professionals, mortgage brokers and other financial professionals in helping their clients put an end to their tax problems. If you would like to contact James for a free consultation: Call: 1-888-868-1400 Email: jbell@taxsolutionscanada.com 22
Disclaimer This e-book was created on December 18, 2013. All information contained in this e-book is based on research performed up to and including the above noted date. This e-book provides only a brief overview of the subject matter discussed and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific advice should be obtained from a tax professional before making any application to Canada Revenue Agency. 23