The vast majority of Canadians — 95% according to the Canada Revenue Agency — pay their taxes without any intervention from the CRA. Those who don’t can find themselves in deep water with the taxman.

“Typically, the ones who have serious problems have ignored tax statements of account for a period of time, so the interest has run [up] and often dwarfs the original principal,” says Robert McMechan, a tax lawyer in Ottawa. “If clients deal with the CRA’s collections department early on and make efforts to make payment arrangements with it, it will go much more smoothly. If clients let it go, then it can erupt
at some point — and not to their advantage.”

If one of your clients runs afoul of the tax agency, here’s what they should know:

> The CRA is vigilant about going after tax debtors. If a tax return is not filed before the April 30 deadline, the CRA charges a 5% penalty on the amount owing — 10% if it is a second offence. Thereafter, it charges a penalty of 1% a month for late filing.

> Interest is charged on balances owing starting May 1, and compounds daily. The CRA charges interest based on the T-bill rate at the beginning of the current quarter and adds 4%.

> Thirty days after a taxpayer receives a notice of assessment or a notice of reassessment, if there has been some dispute, the CRA will contact the taxpayer with a second request. If the taxpayer neither pays nor contacts the CRA to make payment arrangements, a final letter is sent out.

> If there is still no response from the taxpayer, the CRA takes out the big guns, intercepting funds from third parties owed to the delinquent taxpayer, such as garnishing employment income or seizing and selling the taxpayer’s assets.
Meanwhile, interest charges continue to grow on unpaid balances.

“Unlike others, we don’t choose our creditors. The clients come to us,” says CRA spokesperson Colette Gentes-Hawn in Ottawa. “In fairness to the 95% of taxpayers, we have to do whatever we can to make sure everyone pays their fair share.”

Taxpayers have the right to appeal the principal amount of the assessment within specified time limits. An appeal is made first to a CRA appeals officer. If the taxpayer isn’t satisfied with the decision, it can be appealed to the Tax Court of Canada and, failing that, to the Federal Court of Appeal. Occasionally, tax appeals go to the Supreme Court of Canada. Collection action on the portion in dispute will be temporarily suspended during the appeals process; interest accumulation will not.

The CRA has the power to impose a “frivolity penalty” of 10% if an appeal is deemed to be nothing more than a stalling tactic, although this is rarely invoked. There is also a fairness provision in the Income Tax Act, through which it is possible to request part or all of the interest and penalties be waived, although the principal is still owed.

The CRA will consider a fairness application when interest and penalties have accumulated for reasons beyond a taxpayer’s control, such as unemployment, serious illness or natural disaster. The CRA may also waive interest and penalties if it judges that its own actions — errors or delays — have led to these being assessed.

McMechan asks clients for the authorization to obtain a breakdown of their statement of account from the CRA. The statement of account is the total of all liabilities over the years, including principal, interest, penalties and any credits. The CRA will send a breakdown of each part of the total liability if this is requested.

“Often [a client] doesn’t understand the effect that interest has had over time unless you show them,” McMechan says. “You can also see what part of the account is interest and penalties, because those are the only parts you can apply to have waived.
You then assess with the client whether there are circumstances that would permit a good basis for a fairness application.”

An appeal for fairness relief begins as a letter of request. If the relief is denied, there is a second level of review available at the CRA. Finally, the client can apply for judicial review of the CRA’s decision at Federal Court, which can refer the matter back to the CRA for review with a direction to keep certain considerations in mind.

@page_break@Even if a fairness application is made, the CRA won’t consider it unless a payment schedule has been worked out to retire the principal amount owing. The CRA will want full evidence, including full income disclosure, expenses, assets and liabilities, before it accepts a payment schedule.

“We’re very amenable to arrangements,” says Gentes-Hawn. “We’d rather have our money a little bit at time than not at all.”

And as a last but drastic resort, there is always a declaration of personal bankruptcy, which could see the CRA lose its claim — although not always. “The government sometimes fights the bankruptcy on the tax side,” McMechan says. “It depends on the facts of the case.” He has seen cases that were so desperate — with interest accumulating over decades — that bankruptcy was the client’s best solution.

The easiest route, however, is to contact the CRA early in the process and to co-operate.

If the taxpayer has a history of compliance, is forthright, does not evade the CRA’s inquiries and is pro-active, the CRA’s corrections department can be a co-operative place, McMechan says.

“But I suspect the CRA sees a fair number of people who fall on the other side of the ledger,” he adds, “and the agency can be pretty tough on them.” IE