4 Ways to Cut the Penalties and Interest on Your Tax Debt 1
Table of Contents Content Page Number Overview 3-4 The Voluntary Disclosure Program 5-10 Notice of Objection 11-14 The Taxpayer Relief Provision 15-18 Consumer Proposals 19-23 Author Bio 24-25 2
Overview Having a tax debt is serious and it is scary because CRA have super collection powers far more than other creditors. CRA do not need to give you a hearing or a chance to explain before they assess you and start collection action. How aggressive CRA gets (and how quickly) depends on many factors, but this depends particularly upon how they have perceived your conduct. Once interest and penalties are assessed, the penalty and interest portion of the tax debt can often be greater than the amount of actual tax you owe. This can make an otherwise manageable tax debt unmanageable. When you have a large tax debt and cannot pay, CRA can be relentless when pursuing the money from you, taking aggressive enforcement action, leading to financial hardship. One of the most common questions that we are asked by clients is how they can reduce the penalties and interest assessed on their tax debt. Penalties can be assessed for many different reasons, including: Late remitting/failure to remit Gross negligence Failure to deduct Failure to make a payment to a Canadian financial institution (Threshold 2 remitter) Penalty for failure to file an information return by the due date Failure to complete the TD1 Failure to obtain your employee's social insurance number (SIN) Failure to file the Record of Employment (ROE) Third-party civil penalties Failure to pay amounts deemed to be held in trust Failure to maintain or provide adequate records Failure to honour a payment 3
In addition, interest is calculated at a prescribed rate, compounds daily, and is applied retroactively to the date that the filing in question was due. This e-book covers 4 programs/processes that give you leverage to potentially reduce or eliminate the penalties and interest assessed on a tax debt. These include: The Voluntary Disclosure Program Notices of Objection The Taxpayer Relief Provisions Consumer Proposals This e-book discusses each, who qualifies and the process. 4
Chapter 1: The Voluntary Disclosure Program 5
What is the Voluntary Disclosure Program? The Voluntary Disclosure Program (VDP) is an official CRA program that enables taxpayers to voluntarily disclose: Undeclared income both with respect to unfiled returns and returns that have been filed where income was omitted Inaccurate information Incomplete information The VDP covers disclosure that relates to income tax, services tax like GST/HST, as well as charges related to the Softwood Lumber Products Export Charge Act, 2006, or the Air Travellers Security Charge Act. Why disclose income that CRA doesn t know about? Because if they get to you before you make a proper disclosure under VDP, you will be subject to penalties, interest and even criminal prosecution, depending on the severity of the nondisclosure. Who qualifies for VDP? You may qualify for the Voluntary Disclosure Program if you are an individual or business in Canada who would like to make disclosure about income tax, services tax like GST/HST, as well as charges related to the Softwood Lumber Products Export Charge Act, 2006, or the Air Travellers Security Charge Act. Your disclosure must involve a tax year that is at least one year old and involve the application of a penalty. In addition, the disclosure must be both voluntary and complete. Failing to meet these criteria are by far the two most common reasons that VDP can be rejected. We have elaborated on these reasons below: 6
Voluntary This means that you are completely unaware and had no knowledge of any enforcement action being commenced against you. Disclosure is not voluntary when: An audit or investigation by CRA is in process CRA has made a request or demand for information There has been direct contact made by a CRA employee to a taxpayer concerning a compliance issue If CRA has not contacted you, then it is essential that your application is made before they do. Avoid contacting CRA to request information or discuss issues that may raise a red flag and trigger contact in advance of your VDP application being properly initiated. Complete This means that you have provided complete details and documentation with respect to all tax years and/or reporting periods where non-disclosure has occurred and for all types of tax (the most common being income tax and GST/HST). Your disclosure cannot be partial or incomplete in any way. Your VDP application is your opportunity to come clean on everything. In the example of a corporation, when a VDP application is made, you must also ensure that you have made proper disclosure with respect to all related corporations. This can present challenges to some if you do not have all of your information, are perhaps many years behind filing tax returns or are missing tax slips. If you call CRA to request them, it obviously tips them off, as when the agent goes to put in the request to send you tax slips, they will see that you are behind filing and may forward your file to the enforcement section of CRA accordingly. If you don t request your information, you may be deemed to have not submitted complete disclosure. 7
The more complicated your situation, the more likely it is that you will need to speak to a tax professional to administer your VDP application. There is a lot at stake you have one chance to get this right and avoid the crippling interest and penalties. The application process If you have all of your information (tax slips for tax years in question, documents to support disclosure, books and records etc.): Get tax returns prepared or adjusted Have the VDP application prepared accurately and attach the completed or amended returns You may receive a letter with the VDP officer's name and a reference number advising that your application is under review You will receive a decision on your application Do not wait. Time is your enemy. If CRA gets to you before you get to them, disclosure will not be voluntary and you will not qualify to make an application. 8
If you do not have all of your information (tax slips for tax years in question, documents to support disclosure, books and records etc.): A special letter is sent to the VDP department indicating the tax years in question, types of tax, the nature of disclosure You should receive a letter from the VDP department indicating the VDP officer's name, reference number and specifying how many days that you have to make complete disclosure Completed or amended tax returns are filed You will receive a decision on your application Timeline This process can take 6 months or longer to be completed, but typically if all documentation is completed properly, the average timeline is currently about 6 months. What s next? If your VDP application is approved, the next step is to make arrangements to pay your tax debt. If you have the ability to pay your tax debt in full, do it! 9
If you do not have the ability to pay your tax debt in full, you will have to enter into a binding payment plan with CRA. CRA have the upper hand in this negotiation, but it will have to end up being a payment plan that CRA will accept and that you can live with. This can get tricky because CRA will almost always demand payment in full. They may make a monthly arrangement with you but will request financial disclosure. This can put you in a position where you expose yourself to potential enforcement action because they will ask you things about what assets, investments and income you have. A successful VDP may eliminate interest and penalties, but it does not prevent the full force of CRA s enforcement actions from coming down on your head. If your VDP application is not approved, you should still make arrangements to make disclosure. Failing to do so is tax evasion, which could land you in court with criminal charges levied against you. What you should know Do not provide unnecessary information that will aid CRA in gaining the upper hand in payment plan negotiations Do not try to pick and choose what you will disclose disclose as much as you can. A simple mistake can cancel your right to this VDP relief Request past years tax slips from previous employers (not CRA) to figure out what you earned If you are in business for yourself and have no proof of income, request bank statements for the tax years in question Consider seeking professional assistance DO NOT contact CRA before the Voluntary Disclosure application is filed 10
Chapter 2: Notice of Objection 11
Notice of Objection A Notice of Objection is a legal avenue under section 165 of the Income Tax Act where you may object to an assessment made by CRA. Common instances where individuals and businesses will file a Notice of Objection include but are not limited to: - The individual or taxpayer is audited and has their tax returns re-assessed and disagrees with some aspect of the re-assessment. - The individual or taxpayer is simply re-assessed by mail and disagrees with some aspect of the re-assessment. - The individual or taxpayer disagrees with the assessment of a penalty. Even if you agree with the re-assessment or assessment of the taxes owed, you may still file a Notice of Objection to object to penalties. A very common example of this is where gross negligence penalties have been levied. These penalties can be up to 50% of the tax debt. When these penalties are assessed retroactively and compound interest is applied to both the tax debt and gross negligence penalty retroactively, this can cause a tax debt to double or triple in size. The result can be that a tax debt grows to a size that makes the repayment by the taxpayer incredibly difficult, if not impossible. There is merit to filing a Notice of Objection if penalties have been applied to your tax debt. Who qualifies? Anyone can file a Notice of Objection, but timing is crucial. The time limit to object to an assessment or re-assessment is the later of: 12
Within 90 days of the date on your (re)assessment notice from CRA; or Within one year after the date of the return's filing deadline What can you do if the 90 days has passed? If you were unaware that you could file an objection because you did not receive the notice from CRA or something out of your control prevented you from objecting, you may request an extension. This right to ask for an extension to object lasts for 12 months after the 90 days has passed. The request for an extension must include the reason why you didn t file the objection. It is at CRA s discretion whether or not they grant the extension, so the extension request should be thorough and well documented. The application process Notice of Objection is filed If CRA has questions, they will write to you A decision will be made Timeline This process can take months or even many years, depending on the reason for your objection. For example, if you are making an objection concerning a matter similar to a matter already before the tax court, your objection may be held pending a decision by the court. In the case of charity schemes, we have seen objections take upwards of 8 years as the court process can be slow-moving. 13
What happens next? If your objection is approved and any tax debt remains, it will be due in full. If you have the ability to pay your tax debt in full, do it! If you do not have the ability to pay your tax debt in full, you will have to enter into a binding payment plan with CRA. CRA have the upper hand in this negotiation, but it will have to end up being a payment plan that CRA will accept and that you can live with. This can get tricky because CRA will almost always demand payment in full. They may make a monthly arrangement with you but will request financial disclosure. This traps you in a position where you expose yourself to increasing CRA s ability to take enforcement and collection action against you - because they will ask you about what assets, investments and income you have. If your objection is rejected, your tax debt will be due and CRA will proceed to try to collect the money from you. Your options will then be: Make arrangements to pay your tax debt and put everything behind you Proceed to tax court and ask a judge to make a ruling with respect to your Notice of Objection File a Taxpayer Relief application (if you qualify) to request relief of penalties and interest What you should know While your objection is in process, CRA will stop collection action against you. If your objection is rejected, collection action will re-commence and you will be responsible for payment of all penalties and interest, retroactively, on the tax years in question. During the objection process, interest will continue to compound daily. 14
Chapter 3: The Taxpayer Relief Provision 15
What is Taxpayer Relief? Another very common way that individuals and businesses may seek to reduce the penalties and interest associated with their tax debt is Taxpayer Relief. Taxpayer Relief is an application you can make to CRA explaining specific circumstances that you believe CRA should consider and therefore reduce or remove penalties and interest associated with your tax debt. Who qualifies? CRA will allow any person to make a Taxpayer Relief application for extraordinary circumstances. However, the most common reasons are: Extreme financial hardship Medical problems or death in the immediate family unit Disaster fire, flood, etc. Error on the part of CRA undue time delays processing an application like a Notice of Objection could be grounds for Taxpayer Relief as an error on the part of CRA How likely will they be to approve your application? This will depend on how compelling your grounds for relief are and also how well documented and supported your claims are. Whatever your grounds for relief, it is vital that you support your application with documentation that proves your claim to be true. For example, if it is a medical problem, copies of your medical records, evidence of treatment or a letter from your doctor are examples of ways you can prove that you do in fact suffer from a serious medical problem. With this said, one must be careful in the case of financial hardship claims because any financial information you do divulge could be used against you later, when the enforcement arm of CRA pursues you to collect the tax debt owed. For example, if you provide your bank statements to CRA, you will be showing them exactly where they can go to freeze your bank account. 16
The application process The application is made CRA will notify you of their decision If rejected, you may request a second review of your application and provide additional information for consideration Timeline The Taxpayer Relief application process can take 6-12 months. If you have filed a Notice of Objection, CRA will not process your Taxpayer Relief application until a decision has been made on your objection. Once a decision is made on your objection, CRA must be reminded of the Taxpayer Relief application - you cannot count on them to do this automatically. We have seen many instances where CRA has not processed a Taxpayer Relief application because they shelved it as a result of an objection but did not connect the dots and put it back on the action list at the end of the objection process. These are different departments that get lost in a huge bureaucracy. What you should know CRA will continue to attempt to collect on your entire debt even while processing a Taxpayer Relief application. 17
If CRA has rejected your initial application, you may be advised to seek professional counsel before submitting the application for a second review. Why? Because after the second review, the next step is a judicial review. If you proceed to have your application set down for judicial review, this will involve tax court, which can get very expensive, and even if the judge agrees with you, they can only render an opinion it is at CRA s sole discretion to grant an application for Taxpayer Relief. 18
Chapter 4: Consumer Proposals 19
What is a Consumer Proposal? A consumer proposal is your right to protection from your creditors (including Canada Revenue Agency) when you are honest but unable to repay the debts exactly the way the creditors are demanding. A consumer proposal is not a bankruptcy but it does provide you with the same protection. When you file a consumer proposal, it does not interfere with your right to keep your house, car, RESP, RRSP and other important assets. It does require you to treat your creditors fairly in the circumstances. Does it really cover Canada Revenue Agency and tax debts? Absolutely. The protection rights you have under consumer proposal laws are from federal legislation from the same parliament that made the Income Tax Act and other tax laws. They could not have a conflict between these tax laws, so they clearly laid out that the consumer proposal rights of the debtor would overrule tax laws. Can anyone make this offer? You have to meet some simple qualifying criteria such as: Being unable to pay your debts as they become due Owing more than $1,000 Owing less than $250,000 (excluding debt secured over your principal residence). There is other access to similar proposal protection if the debts exceed $250,000, again other than bankruptcy. Why is a consumer proposal different from a settlement? Generally, when a person is negotiating a settlement with their creditors, the negotiation begins from the full amount down. That is a tough argument to have because every creditor wants their money in full. 20
In a consumer proposal, your advisor (who must be an administrator licensed by the federal government and also be licensed as a trustee in bankruptcy) will calculate what the creditors would get if they did not accept your offer to settle and you were forced to consider a bankruptcy filing; that is, the negotiation power now turns on its head and starts from the floor up (not the ceiling down). The creditors now start thinking about what they gain by taking the fair settlement deal and not what they are writing off in exchange. Why do creditors accept these settlements? Money. Everyone prefers to get more money (what is offered in the proposal) than less money (what the licensed administrator has calculated they would get in a bankruptcy). Who decides how much to offer? You do, but you will be guided by the experience of the administrator, whose job it is to help you ensure that the offer is fair and reasonable. It is usually a lot less than the full amount owed, and the interest stops. What if some of my creditors do not accept? As long as the majority by value of your proven creditors say yes, all the creditors are forced into the consumer proposal by the federal law. The tail cannot wag the dog! which is often the problem in settlements arranged outside of the consumer proposal rights. Who will find out? Only the creditors you owe money to, the administrator, and his/her federal government regulator. There is no advertisement in the newspaper. 21
Is it expensive? You can only offer what you can afford. You do not have to have a lump sum. The vast majority of these consumer proposal settlements are done by way of 60 affordable monthly payments. Interest stops. You will pay no other fees for the consumer proposal, as the administrator earns a fixed tariff set by the government, which is paid out of the monies offered to your creditors. The monthly payment is usually a fraction of the payments you were carrying prior to taking this route so your overall budget will be a lot healthier. Do I have to face my creditors and be judged by them? No. The administrator stands between you and the creditors. He/she makes the offer on your behalf. If the creditors have questions or want to negotiate the offer, the administrator relays the questions and answers between the parties. Remember, if the creditors do not want to take the offer you made, the administrator has formally warned them that they will get less money. How complicated is all this? It is very straightforward. You meet with the administrator, provide some basic information (income, assets, debts, etc.) and the protection can be started within a day. The administrator will notify the creditors immediately. You will only need to make monthly payments to the administrator s trust account (heavily regulated and monitored by the federal regulator to protect you). You do not have to figure out any payments to the creditors. That is the administrator s responsibility. What does this protection mean? As stated above, the protection is given to you by federal law. From the moment your offer is formally made by the administrator, the creditors must obey this federal law. They cannot hire collection agents to harass you, lawyers to sue you (existing court actions are stayed which means stopped), they cannot freeze your bank account, garnishee your wages, cancel your car financing and similar contracts (if it is in good standing) or seize and sell your house or other assets. 22
What happens to my credit? If you cannot get a loan your credit is already ruined. A consumer proposal can be the fastest way to repair your credit. Even if the offer accepted by the creditors is for 60 months, you can always complete the offer sooner and rebuild your credit far quicker than if you were burdened with a mountain of debt. The consumer proposal will be reported to your credit report, where it will remain for 3 years from the date it is paid in full. You can begin rebuilding your credit immediately through such tools as a secured credit card. A good administrator can advise you on this rebuilding. Navigating These Processes All of the above processes are official processes that are complex, but if leveraged properly, they could reduce or eliminate the penalties and interest associated with your tax debt. You must be careful, because if you make mistakes when navigating these processes, your applications could be rejected and you could even expose yourself to serious legal consequences. Unless you are a seasoned professional who has experience processing these types of applications, it is strongly advised that you seek the guidance of a tax professional. We hope that you have enjoyed this e-book and have found the information useful. We wish you good luck in your endeavours to resolve your tax issues. 23
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: 24
Call: 1-888-868-1400 Email: jbell@taxsolutionscanada.com Disclaimer This e-book was created on December 11, 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. 25