The stress you feel when you owe money to the Canada Revenue Agency is for good reason. Similar stress exists even if CRA have not yet assessed you but you have outstanding returns to file or undisclosed income. Especially when you have assets, it is natural to go into damage control mode and start trying to protect what you have.
The pressure to “do something” intensifies when an individual owns a home (and even more so when the home is jointly owned with a spouse).
The only time it is 100% safe to transfer or gift your assets is when you have no debts of any kind. But if the debt is a tax debt you need to be extra careful as CRA have automatic powers that no other creditor has.
CRA have the right to place a lien on your home. Effectively, this is the same as a mortgage that CRA places on your interest in the home without having to give you any warning or hold a hearing. Many people do not find out until they try and refinance or sell the home.
What are the consequences of a tax lien related to a tax debt?
- CRA can force the sale of your home
- Your bank can refuse to renew your mortgage
- Your financing options become fewer and more expensive because not all lenders will finance a person who has a tax problem – even if the refinancing is to pay off the entire amount of the tax lien.
- Interest will continue to compound daily
- Additional CRA liens can be added as additional tax debt is identified by CRA
- CRA will become far more difficult to negotiate with (see refer to our other blog or website it is possible to reduce what CRA thinks you owe) because they are now secured.
- If the lien is most or all of your equity in the house you essentially become a renter because as long as you owe CRA money you will not be able to do much with your home except sell it. Every dollar you pay down on your mortgage and every dollar of increase in your home’s value are for CRA’s benefit not yours.
The first idea most people have when trying to protect their home from CRA, is to transfer ownership to a family member, such as a spouse or parent. The lawyers they ask to process this transaction generally do not ask “why”. Of course it is possible to make this transfer when there is no lien or similar restriction on the title. CRA has seen every move that taxpayers have ever tried and have together with the Federal government closed off these loopholes. . Section 160 of the Income Tax Act (similar sections exist in the Excise Tax Act to catch HST lien avoidance) is the loophole closing law that catches you here.
Under section 160 if, at a time you owe CRA money, you transfer the asset (house or other) to someone and do not receive full market value back in return the non-third party person CRA can and will assess that recipient for the taxes you owed (to the value of the asset transferred). This recipient is now open to all the levels of attack you were against any of their assets – not just the property you transferred. Do you really want to give a loved one a tax debt “gift”?
So what can you legitimately do? The strategy depends on the exact status of your dealings (or non-dealings!) with CRA. Some of the most common items are:
- CRA has not yet contacted you and is not yet aware of your tax compliance problems – You are actually very well positioned if CRA has not contacted you about late filing or undisclosed income to make an application under the Voluntary Disclosure Program. If you are accepted into this “one shot to get it right program”, you will have eliminated the penalties, interest and prosecution. Because this should significantly reduce what you will owe overall, the next step will be to negotiate repayment arrangements that CRA will accept and that you can live with.
- CRA is aware of your tax compliance problem/back tax debt, has initiated contact but has not yet placed a lien on your home.
- CRA is aware of your tax compliance problem/back tax debt and is coming after you – no lien yet.
In the above 3 situations you are still able to use the equity in your home to pay back CRA. Generally speaking the mortgage lenders charge lower rates if the refinance is not to eliminate a tax lien. Of course there are other options to repay the CRA including payments over time. However, these require full knowledge of CRA negotiation restrictions and process. Consult an expert as a broken repayment plan has significant adverse consequences.
- CRA is aware of your tax compliance problem/back tax debt a lien has been placed on the home – You have fewer options and aggressive negotiation, specialized resources and possible Federal government programs will need to be leveraged to overcome this challenge.
All of the above require in-depth knowledge of CRA processes and procedures and when there are assets involved we never recommend contacting CRA directly.
If you are in trouble with CRA (and definitely where you own a home), speak with a tax professional as soon as possible to put you in a position to protect your home and resolve your tax problem.
Don’t assume that transferring your home to avoid paying a tax debt will solve your problem! It won’t – it will just create even larger problems. For more about how to avoid a tax lien being placed on your home, please contact Tax Solutions Canada today by calling 1.888.868.1400.