August 24, 2020
When you are facing the harsh reality of a tax debt, you may be wondering whether the Canada Revenue Agency (CRA) will accept a settlement to reduce your tax debt. CRA does have programs where, if you qualify, CRA may cancel interest and penalties – but CRA does not have the same authority as the IRS in the USA and can never make a settlement on principal under the Income Tax Act. The only way to reduce your principal tax debt is under other Federal Legislation which has other implications and benefits. This other Federal Legislation is not the first choice and needs to be considered only when all of your other options are exhausted.
If you want to try to get the penalty and interest portion of your tax debt reduced, there are several key things to know:
- First – and as we have mentioned – CRA will not negotiate on principal. CRA will not reduce the principal portion of your tax debt even if it would be fair and make full business sense because they have no authority to do so under the Income Tax Act. Trying to get them to lower it is a fruitless endeavour.
- Reducing some or all of the interest and penalties associated with your tax debt can mean a significant amount of savings and make the remaining balance possible for you to repay (even if on terms) – so it makes sense to consider Taxpayer Relief. To qualify for Taxpayer Relief you must be able to prove to CRA that an extraordinary circumstance led to the tax debt, penalties and interest or your inability to pay it. These extraordinary circumstances include medical problems, disability, disaster, financial hardship, death, error on behalf of CRA, etc… If you qualify, you may be able to have your interest and penalties reduced, or eliminated fully. This program can help significantly, especially since interest and penalties can get so large that they actually end up being more than the initial tax debt. However, being approved under this program is at CRA’s discretion. Relief submissions must outline not only your grounds for relief but must contain evidence to substantiate your claim. The more complete, robust and documented the submission is, the higher the likelihood is that it will be approved.
- Be careful not to say too much in your submission. We have seen people who were rejected for relief when they had grounds because they included unnecessary information that actually caused the application to be rejected.
- If you have a medical problem and have not sought treatment – get it. Better late than never and as mentioned you must be able to substantiate your grounds for relief; seeking treatment if your grounds are medical is a good start. Depression, addiction and anxiety are three medical problems that many people struggle with and that often go untreated.
- If there is no realistic way that you can pay the tax debt, even if the penalties were cancelled, then you may want to consult your tax professional about the process of making a consumer proposal. A consumer proposal can stop collection action, allow you to make an affordable monthly payment, freeze the interest accumulating on your tax debt and in some cases even reduce your tax debt. A tax professional that specializes in helping people with tax problems should have experience with licensed trustees and should be able to help you start the process to see if a consumer proposal is the right answer for you. It is not the right answer for everyone, but for some it provides immediate, much needed relief.
As noted above, for all of these scenarios, the best way to deal with a tax debt is to seek professional tax help. Negotiating directly with CRA can be dangerous, and the best way to keep yourself protected is by working with an organization that has experience negotiating with CRA and navigating through various CRA programs.
When you are dealing with a tax debt the worst thing that you can do is ignore it – it will not go away on its own and CRA will get more and more aggressive in their attempts to get what they believe is owed to them. Although CRA will not accept a settlement to reduce your tax debt, there are various financial options available to individuals facing tax debts, and so exploring them is crucial. The best way (and really the only way) to reduce your tax debt is to pay it – terms can be available if the appropriate requests are made.
For more information about dealing with a tax debt, whether through a payment plan, Taxpayer Relief, or the Voluntary Disclosure Program, please contact us.