September 24, 2013

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The Canada Revenue Agency (“CRA”) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it is a safe assumption that some percentage of the 25 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2012 taxes when due or still owe money from past years – or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable no matter who the creditor is. There are, however, a number of detailed reasons why owing money to the tax authorities is a particularly bad situation to be in.

Those reasons start with the interest cost of carrying such debt. Although interest rates remain at historic lows, the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For each quarter, the interest rate charged on taxes owing is equal to the average treasury bill rate in effect during the first month of the previous quarter plus four percent. For the third quarter of 2013, therefore, covering the months of July, August and September, the interest rate charged on taxes owing is 5%.

While that 5% rate is, for instance, still lower than the interest rate charged on most credit card balances, it is the interest calculation method used by the Agency which can really inflate the interest cost of having tax debts. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated by this method add up quickly.

The CRA also has a broad range of options at its disposal to compel payment and a surplus of time in which to use such action. Where a taxpayer hasn’t paid an amount owed within 30 days after he or she receives a Notice of Assessment stating the amount owed, the CRA will usually contact the taxpayer, by phone or by mail, with a request for payment. If the taxpayer does not contact the Agency to make a payment or set up a payment arrangement within 90 days after the date the Notice of Assessment was mailed, the CRA will likely resort to its other collection options.

The CRA has the right, where there are any amounts owed to the taxpayer by any other department of the federal government (e.g., a goods and services tax credit amount or an Old Age Security payment) to, in effect, seize those amounts and apply them to the tax debt. The CRA also has the authority to intercept (or garnish) money owing to the taxpayer from a third party, like an employer, and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.

Of course, the CRA’s goal, like that of any other creditor, is to get the debt paid without having to resort to expensive and time-consuming administrative or legal processes.  It’s relatively rare for a tax debt to reach the stage of litigation or garnishment as it is in everyone’s interest to resolve matters before dispute reaches such levels. However, contrary to popular belief, the CRA does have flexibility. When the amount of taxes due on filing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interest to contact the CRA and present the issue. For this reason, the CRA tries to make it easy for taxpayers to contact it to make such arrangements. A toll-free telephone line (1-888-863-8657) is staffed by agents from 7 a.m. to 11 p.m., Monday to Friday, except on statutory holidays. The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily.

The alternative to making a payment arrangement and becoming subject to the CRA’s punitive interest assessment practices is sometimes to borrow the required funds from a third party and to pay the CRA in full as soon as possible. Especially where the taxpayer can provide some security (like the equity in a home), it may be possible to borrow funds at less than the 5% interest rate currently being charged by the CRA on overdue tax amounts.

One final blow: interest paid on tax debts, whether paid to the CRA or to a third party lender, is not deductible from income.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

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