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There are usually four stages involving tax problems:
When a taxpayer has no dispute over the amount of tax, interest and penalties due to CRA, the tax problem really boils down to the taxpayers ability to pay CRA. If a taxpayer is unable to pay, a problem exists, provided that time is needed to repay any amounts owing. Taxpayers who do not have the ability to pay, or pay within terms acceptable to CRA, then a major issue has developed, and it's evitable that the taxpayer will come into contact with CRA collections. When this happens, taxpayers think about how to appropriately protect, income and assets from CRA. This however is a natural reaction, for humans to want to protect themselves and what the taxpayer has worked so hard for. Conversely, once the taxpayer realizes an income tax problem is evident, or suspects that it exists, they should be extremely careful how the issue is handled. Otherwise, the taxpayer could inadvertently expose themselves to a greater attack, or even turn a tax debt into a criminal charge, simply because they are not aware of the severity or how to properly address the issue. Hence, a taxpayer needs to guard against taking any action that will put others including themselves at risk, from a CRA attack, however morally sound it may seem. CRA and the Federal Government is fully aware that desperate people take desperate measures, such as, transfer houses, move funds offshore, etc. It is possible for CRA to deal fairly with a taxpayer, provided that the intentions on the part of the taxpayer are honest and that the correct process and procedures have been implemented with respect to the taxpayers case. However... TAXATION IS NOT A DO-IT-YOURSELF PROJECT! Where taxes are concerned, time is not on the taxpayers side. Each day that passes, both penalties (in many cases), interest (in all cases), accrue at an alarming rate and CRA’s collection efforts get closer to putting your financial well being at risk. In many cases this results in the taxpayer having to file for bankruptcy. Individuals and businesses often get themselves into deeper trouble than they would have been, if they had not played the waiting game. Taxpayers often try to predict the outcome and hope for a stroke of luck that will help them solve their problem. Taxpayers frequently dream of CRA losing their file. NOT A CHANCE! Taxpayers sometimes fall into this type of thinking out of fear and the ones who do, have all the odds against them. Those who foster such illusions, have better odds playing Russian Roulette with five rounds loaded and only one chamber empty. If you have failed to declare income, behind on filing returns or have inadvertently committed some kind of fraud, such as accepting CRA money/credits you weren’t entitled to, charity schemes, failed to pay trust funds (HST and payroll taxes), etc… it is safe to assume that what is coming is a re-assessment, audit or investigation by CRA, along with increasingly aggressive CRA enforcement actions. Once the taxpayers account is handed over to the collections department, CRA collectors look for the fastest and easiest methods they can use to collect outstanding amounts. From an enforcement action perspective, they seek the path of least resistance. They can: 1. Garnish wages and other income Let’s consider one of these enforcement measures so that you can understand the role that assets play in the overall scheme of things. 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 the taxpayer and their assets without even a hearing. They do not need to warn taxpayers. For example, once the Taxpayer has received a copy of the REQUIREMENT TO PAY NOTICE forwarded to the bank, the money is already in the hands of CRA. If the funds are not enough to cover the debt, any future deposits made to that account is immediately transferred to CRA and applied to any arrears taxes owing until the debt is satisfied. Garnishment of salary or wages If the taxpayer is employed by a company where taxes are deducted at source, CRA may garnish your wages - up to 50% of your net earnings. CRA will simply send a notice to the employer and they are required by law, to immediately comply with the demand, otherwise, CRA can hold the employer liable for the tax debt. From an employer's prospective this is not good, they are require to prepare additional paper work to deal with CRA. Garnishing self-employed income If the taxpayer is self-employed, CRA can garnishee up to 100% of the income. CRA will send a demand notices to all the business customers demanding that all amounts outstanding (accounts receivable), are to be forwarded to CRA. This can be incredibly embarrassing and is not good for business when all the taxpayers customers know that a tax problem exists. Consider the extra paperwork that customers are require to prepare just to deal with the CRA. Garnishing other income If the taxpayer receives a government pension or income under another government program, CRA can garnishee it right from the source. Placing a lien on homes This is the equivalent of CRA putting a mortgage on the taxpayers 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 the taxpayers name and then obtain a certificate, without notice to the taxpayer and place a lien on the property. They can do this without a court order, even if there are other people on title. DISCLOSING INFORMATION TO CANADA REVENUE AGENCY Most people want to live a life stress-free and don’t plan to put themselves in trouble with CRA. However, when CRA appears they don’t always go for the jugular, immediately. They utilize good cop/bad cop tactics to gather as much information as they can to use against the taxpayer at a later time. When contact is made for the first time with CRA, it is typical for taxpayers to think that they are lucky and have landed a reasonable professional at CRA to work on the case. The taxpayer begins to co-operate, in fact, the taxpayer believes that they have made a new friend in high places, able to empathize with them. The taxpayer comes to the conclusion that they can communicate with CRA on a professional level, thinking that they do not need an accountant. OOPS! The taxpayer just fell into CRA's Trap #1. The same way that you cannot lie to CRA, taxpayers have no obligation to help CRA learn how to attack them and their assets. Yet every day this happens simply through the taxpayer’s own disclosure, and the consequences are brutal and devastating. Once a taxpayer makes the mistake to initiate contact with CRA, the first thing they will attempt is to gain as much information as they can, and CRA collectors are trained to make taxpayers disclose information. They will try to make the taxpayer voluntarily complete a Financial Disclosure Statement. The entire process is a fishing expedition, and the moment they decide that they no longer want to extend the agreed upon payment plan, CRA can proceed to collect the money through the easiest method they can use, a garnishment, RTP or property lien. If self-employed, routinely asks for a list of customers. If this occurs it should be a tell tale sign or major red flag. Having to give up this list may seem inevitable, but it's not and there is no need to go down that path. Properly utilizing options available to the taxpayer is the route to pursue. It is not easy to negotiate a payment plan with CRA without being asked to making financial disclosure, it is for this reason that it is recommend that taxpayers let an accountant handle the tax issue. REGARDING SECTION 160 OF THE CANADIAN INCOME TAX ACT Transferring assets/accounts/income into the names of spouses, friends and colleagues is dangerous. A taxpayers actions play an important role, if they hope to have the opportunity of having a successful outcome when dealing with the CRA. When taxpayers think about protecting assets, they unknowingly make the biggest mistake like transfer a home into a spouse’s name or open an account with another person’s name on it, thinking it will be safe. Unfortunately, these types of maneuvers can actually backfire causing a spouse, friend or business partner to inherit liability for the taxpayers problem. Owing or even potentially owing money to CRA, at the time of the transfer, is actually putting a gun to the taxpayers head, including someone else. The Section 160 of the Income Tax Act, 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, friends etc). Perhaps the most common example of a tax debtor falling victim to Section 160, is the taking of his/her name off the title of jointly owned property in an attempt to get out from under CRA's collection action. To demonstrates how bizarre Section 160 is, let us look at the a scenario which would create a tax headache for an unsuspecting family member: Unintended Circumstances and the Consequences Mr. Smith currently owes the Canada Revenue Agency, $75,000 from a reassessment he received in April 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 $90,000. Mr. Smith' 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' daughter for $75,000 – the entire amount of his tax debt, under Section 160 of the Income Tax Act. Mr. Smith’ daughter is now legally responsible for all of her father’s tax debt. Due to the mounting pressure for the CRA to collect on unpaid taxes quickly, Section 160 has become a more commonly utilized tool by CRA collectors. As illustrated above, Section 160 is a danger not only to the tax debtor, but potentially to family and friends. Consequently, this means that, if a taxpayer is aware that a tax problem exists, and the taxpayer transfers assets to someone not at arm’s length, the taxpayer is making the receiving person liable for their tax debt. Make no mistake folks! The consequences and the repercussion of Section 160 of the Canadian Income Tax Act, can be devastating, in the event that this type of assessment is placed upon a taxpayer. As mentioned above, taxation is not a Do-It-Yourself Project, therefore coming up with a realistic plan to resolve a tax problem with CRA, is easier said than done. When resolving a tax issue with CRA, in reality, it's like peeling an onion, one layer at a time and the conclusion seldom ends the way it began. Converely, taxpayers have alternatives should they have the misfortune of running into tax problems with the CRA. If you have a tax problem give us a call and we will be more then happy to assit in resolving any tax issues.
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