Income Tax and other Tax Debts
Tax Debts come in many forms, ranging from personal income taxes to directors’ liabilities for unpaid corporate obligations. Tax Debts and unpaid tax obligations are frequently referenced as a major cause of one’s financial difficulty.
With the daily compounding of interest and penalties, tax debts grow exponentially and can be insurmountable. People who are reviewing alternatives to bankruptcy, often arrive at a Trustee’s office believing that Revenue Canada debts will survive regardless of which option they select and must be paid. The most frequent phrase we hear is, “I know I can’t do anything about Revenue Canada, but I want to deal with my other debts.” That situation is simply not true!
TAX DEBTS IN CANADA AND THE U.S ARE TREATED DIFFERENTLY
In the U.S. debts owed to the Internal Revenue Service survive and must be paid even if you go bankrupt. This is very different from the usual situation in Canada. The truth is that you can file a consumer proposal, which takes care of most tax debts, and have these debts included in your consumer proposal. Revenue Canada enjoys no higher status than the claim of any other creditor, and for the most part, these debts will be forgiven if your consumer proposal is accepted and you complete the proposal, receiving a Certificate of Full Performance.
There are exceptions or situations, however, where they may not, i.e. where tax returns have been filled out falsely, or where a person has not filed or paid any tax for many years, accumulating a significant amount of debt.
We address the varying tax debts as follows:
- Personal Income Taxes
If you have not filed tax returns or owe taxes on self employment or other earnings, a consumer proposal, once full completed, will usually absolve you of these obligations. The filing of false tax returns, however, is fraud, and debts incurred as a consequence of a fraud perpetrated by an individual cannot be included in a consumer proposal, and must be paid. In essence, you are better off having not filed your returns or short paying accurate returns than fully paying the sum on a falsified return or returns which purposely understate the true obligation.
- Goods and Services Tax (GST)
A personal GST obligation usually arises from three sources:
- GST collected by you and not remitted to the government on proprietorship earnings or GST on earnings that you failed to collect;
- GST collected by a corporation where you are the Director, and the corporation failed to remit the GST they collected from customers;
- GST credits paid to you based on last year’s personal tax returns, where your income has gone up and you no longer qualify for these credits.
GST debts incurred in connection with all three of the above situations are taken care of when someone completes their consumer proposal and receives a Certificate of Full Performance.
- Unpaid EMPLOYER Remittances or Source Deductions
These types of debts usually arise where you are self-employed and fail to make Income Tax remittances on your income or where you employ others, take deductions off their paycheques, and fail to remit the monies you have collected to the government, or where you are a Director of a corporation where deductions have been taken off employees’ cheques, and the company has not remitted those deductions to the government.
Provided that no returns have been falsified, these types of debts are usually written off when someone completes their consumer proposal and receives a Certificate of Full Performance.
- Unpaid Corporate Income Taxes
If you are a Director of a Corporation, and the corporation fails to file corporate returns or pay their corporate income taxes, these debts are not usually assessed against the Director, because unlike GST or source deductions, they do not represent funds collected from others which have not been remitted.
YOUR SITUATION MAY REQUIRE FURTHER REVIEW
Readers of this website are cautioned that while the above information will apply to most circumstances, our clients face, they do not incorporate every scenario or circumstance. There may be factors particular to your situation that vary from the general or norm. For a full and complete assessment of your tax situation and which debts can and cannot be included in a consumer proposal, we encourage you to contact on of our Consumer Proposal Administrators.