Canada Revenue Agency (“CRA”) has broad powers of collection. CRA can collect amounts owing from a taxpayer including, income tax, payroll deductions, GST/HST remittances, customs, excise and other levies, and benefit overpayments (including Canada child benefit and GST/HST credit). CRA also has the right to collect amounts owed for other government programs, such as defaulted Canada Student Loans, Employment Insurance overpayments and penalties, and Canada Pension Plan overpayments, grants and contributions payments.
Collections Action once Notice of Objection filed
Typically, CRA will wait 90 days after issuing a Notice of Reassessment before attempting to collect on tax owing. Subject to specific exceptions discussed below, when a Notice of Objection is filed by a taxpayer, collections action is held in abeyance pending the results of the objection. Similarly, if a taxpayer appeals further to the Tax Court of Canada, collections action remains in abeyance. However, once a final judgment is rendered by the Tax Court of Canada, CRA is permitted to commence collection action.
Even though collections action may be suspended, the taxpayer may choose to pay off the outstanding amount since CRA applies compound interest on all outstanding amounts. If the taxpayer wins their objection, the interest is removed. However, if the taxpayer loses, they are now responsible to pay both the principal and the interest. CRA does not consider payment of an outstanding account to be a sign that the taxpayer agrees with the reassessment.
Special rules apply to collections action when the taxpayer is a “large corporation”.[1] Large corporations are not protected from collections action while an appeal is in progress, and are required to pay ½ of the federal tax in dispute immediately upon receipt of the Notice of Reassessment.[2]
Exceptions to the Moratorium on Collections Action
As a general rule, collections action is held in abeyance pending the results of a taxpayer’s appeal. However, there are several exceptions to this rule, most notably:
- CRA is permitted to take immediate collections action respecting amounts deemed to be held in trust (i.e., CPP, EI, GST); and
- Non-resident tax.
In addition, if CRA believes that their right to collect the tax is “in jeopardy”, they have the right to seek a “jeopardy order” from the Federal Court – regardless of whether a Notice of Objection has been filed.
Communications with CRA Collections
When a taxpayer owes money to CRA, they will typically receive a “collections notice” along with a “Statement of Interest Adjustment” which sets out the interest that has accrued on the outstanding amount. This correspondence will be sent by a specific collections officer who has been assigned to the client’s file. When dealing with collections matters, it is always preferable to be proactive. The best chance of making payment arrangements with CRA is when the first collection notice goes out.
Typically, it is CRA’s policy that the amount outstanding needs to be paid off in full in 12 months. However, if that is not possible for the taxpayer, the taxpayer will need to provide monthly income and expense information to CRA justifying the amount they are able to pay. In tangent with this, CRA will usually want post-dated cheques for a 6 – 8 months period. Alternatively, taxpayers can make payments online using “My Payments” on CRA’s website, which does not require a “My Account” password or profile.
CRA has broad collections powers, and has no legal obligation to negotiate with the taxpayer for a payment plan arrangement. If the taxpayer is not paying, and a suitable payment plan arrangement cannot be reached, CRA has the legislative right to garnish bank accounts of taxpayers.[3] A garnishment notice is typically called a “Requirement to Pay” or a “Third Party Demand”. CRA usually starts by issuing such notices to the taxpayer’s bank to clean out bank accounts and will then send notices to employers, clients or other sources of income. No warning needs to be issued to the taxpayer in advance. A garnishment notice can be challenged in the Federal Court.
If you are representing a client who receives a Requirement to Pay respecting another taxpayer, it is important to advise them that they have to comply with the requirement. If they fail to comply, that person can become liable for failing to pay CRA.
Director and Shareholder Liability
Directors and officers of a corporation may be exposed to liability for a corporate tax debt if the corporation fails to set aside and remit GST/HST and source deductions. Generally, directors and officers will not be liable for unpaid income tax of a corporation unless it can be shown that the director participated in a certain decision-making process to effect avoidance of the income tax debt.[4]
Shareholders of a corporation could also face liability for a corporate tax debt. Pursuant to s. 160 of the ITA, if a shareholder receives a dividend (or other property) from the corporation at a time when the corporation owed income tax debt, CRA can hold the shareholder jointly and severally liable with the corporation for the corporate tax debt (up to a maximum of the amount of the dividend/property so received by that shareholder).
Co-Authors:
Amanda S. A. Doucette
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: adoucette@shtb-law.com
Blog: https://taxchickca.wordpress.com/
Jessi Brockman
STEVENSON HOOD THORNTON BEAUBIER LLP
500-123 2nd Avenue S, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: jbrockman@shtb-law.com
[1] Section 301(1.2) of the Excise Tax Act (Canada) (“ETA”) and ss. 165(1.11) and 225.1(8) of the Income Tax Act (Canada) (“ITA”). There is typically a reference to the status of “large corporation” at the bottom of the Notice of Reassessment.
[2] Section 164(1.1)(d)(ii) of the ETA and 225.1(7) of the ITA.
[3] Section 224 of the ITA and s. 317 of the ETA.
[4] See for example, Groscki v. The Queen, 2017 TCC 249.
The information in this guide is not legal advice. We encourage you
to consult with your legal advisor for specific advice.
This article was originally published in Bar Notes.