If you owe money to the Canada Revenue Agency but don’t file on time, you will be charged a CRA late filing penalty. The CRA late filing penalty is 5% of your balance owing plus 1% for every full month that your return is late, up to a maximum of 12 months. As you can tell, if you have a large amount of tax arrears, this can become quite expensive.
The situation becomes even more difficult to handle because the CRA has very strong powers to collect tax debts. The agency can garnish wages, seize assets or take legal action against you to collect the debt.
If you are unable to afford the taxes that you owe, one option is to file for bankruptcy. Bankruptcy is a legal process that allows you to eliminate most (if not all) of your unsecured debts. This includes tax debt.
Bankruptcy and Tax Debt
However, it’s important to understand the bankruptcy process before you turn to this solution to solve your issues with tax arrears.
Bankruptcy is a legal process that is administered by a licensed trustee in bankruptcy. When you file for personal bankruptcy, the vast majority of your unsecured debts (credit card debt, personal loans, unsecured lines of credit, tax debt, etc.) are eliminated. Bankruptcy also puts an end to any wage garnishments from unsecured creditors (such as the CRA) and stops civil legal action against you to collect debt.
How Bankruptcy Affects your Life
However, bankruptcy also negatively affects your credit report. Once you file for bankruptcy, a note is placed on your credit report indicating that you have done so. This note remains on your report for six years after you have been discharged from bankruptcy and longer if you have filed for bankruptcy in the past. The bankruptcy process itself lasts at least nine months and up to 36 months, depending on your particular situation.
Having a bankruptcy noted on your credit report can make it difficult for you to get a loan in the future. In addition, you may lose some assets when you file for bankruptcy. In general, you are allowed to keep assets that are deemed necessary to live a basic lifestyle. This list of exempt assets varies by province. You could lose assets that are not considered exempt.
You may also be required to make surplus income payments to your creditors, depending on your income and family size.
In addition, you are not able to be a director of a corporation if you file for bankruptcy.
As you can see, there are a number of consequences to filing for bankruptcy in order to eliminate tax debt. While bankruptcy can help those who have significant tax arrears and who have been hit with the CRA late filing penalty and other collection efforts by the CRA, it is not the only option.
If you are dealing with significant tax debt that you are struggling to pay, Tax Solutions Canada can help. Call us today at 1 888-868-1400.