The Canada Revenue Agency (CRA) collects amounts owing such as: individual and corporate income tax, payroll deductions, GST/HST remittances, benefit overpayments (eg, Canada child benefit and GST/HST credit), etc. The CRA can also collect amounts owing for other government programs, such as: defaulted student loans, EI overpayments and penalties, CPP overpayments, etc.
If a taxpayer has failed to pay their tax debt or failed to pay it in a timely manner, the CRA will assign a “collection officer” to that taxpayer. The collection officer will attempt to have the taxpayer pay the tax debt in full (if possible) or enter into an arrangement with the CRA to pay the tax debt over a period of time. Interest will generally continue to accrue during this period.
Before the CRA will agree to an arrangement (usually monthly payments), the CRA will expect the taxpayer to provide financial disclosure (that is, details with respect to their household expenses and income on a monthly basis and net assets). This is to ensure that the proposed arrangement is the best offer the taxpayer can make. CRA payment arrangements are usually reviewed every six months.
The CRA is a very powerful creditor. The CRA has a wide range of tools to collect taxes owed and can deploy these tools more quickly than other creditors.
The CRA can collect the debt owing by:
1. If a tax debtor is owed money by the federal government, the CRA can issue a set-off to divert those funds to the CRA to be applied against the tax debt. The simplest example is if a taxpayer has arrears with the CRA and in a future year files a tax return for which the taxpayer ought to receive a refund, the CRA will keep the refund and off-set it against the amount owed.
2. The CRA can issue a garnishment and seize funds that a third party owes to the indebted taxpayer. The third party is usually a bank, an employer or some other source of income.
3. The CRA can register your debt in Federal Court. The CRA will likely do this without warning. Once the debt is certified, the certificate has the same force and effect as a judgment obtained in court. This is usually done as a precursor to placing a lien on property (usually a house).
4. The CRA can seize and sell assets. This can include a house, boat, car, rental property, etc. It is not common for the CRA to seize and sell homes or other property in Ontario. In Western Canada, the CRA is more likely to seize and sell property.
5. The CRA can hold third parties jointly and severally liable for your tax debt. For example, if you were the director of a corporation which incurred GST/HST and/or payroll debt, the CRA may assess you personally for the debt. If you have a tax debt and, in certain circumstances, transfer property to a non-arm’s length party for less than fair market value, it may be possible for the CRA to collect your debt from that person under section 160 of the Income Tax Act.
The CRA cannot seize (except in Quebec) jointly-owned property for the tax debt of one of the owners, unless the CRA obtains an order of partition. Usually, the CRA won’t seize and sell joint property. However, if property has been transferred into joint ownership (or the tax debtor contributes funds to the joint owner to purchase the property) after the tax debt arose, the CRA will likely try to collect the tax debt from the joint owner. A common example is when one spouse pays 100% of the mortgage on a house that is divided 50/50 between spouses.
An execution (ie, lien) against a tax debtor can be registered on jointly-owned real property.
Interest and Penalties
The CRA charges interest on unpaid balances at 5 percent compounded daily. Penalties do not increase with the amount of time you have had a tax debt. Penalties are usually applied when you are assessed (or reassessed) after filing tax returns. The most common penalties are late-filing and repeated late-filing penalties, failure to report income and gross negligence penalties. Interest is charged on your entire tax debt, which may include penalties.