Taxes owing and unfiled tax returns are a serious issue in Canada. Canada Revenue Agency (CRA) has always taken a tough approach to individuals or businesses who are in arrears, either through unpaid taxes or having not filed returns. Filing tax returns is a statutory duty under the Income Tax Act (ITA) in Canada. Failure to do so can land you in trouble with CRA.
You cannot simply opt out of paying your taxes or filing returns. Unfiled returns carry with them penalties and interest which can be very harsh, and which can grow from a minor amount owing into a very unmanageable amount in a short time.
CRA has wide powers afforded itself as a government agency. It can collect on balances owed it in many ways, and it can skip the regular process of an application to the court and all the time delays inherent in that system. CRA just bypasses the courts and can register liens on houses/property, garnishee business receivables, wages, etc.
But one of the carryover myths of the darker ages of bankruptcy is that CRA can force you to file bankruptcy for unpaid taxes.
Just like debtors’ prison, things have changed for the better in the modern world. The authorities no longer throw you in jail if you have debts you can’t pay. Neither do they ransack your home & take all your valuables, nor do they deport you, all things we have been asked regularly in our business as trustees.
And CRA does not force a person or a business to file for bankruptcy simply due to taxes owed.
They do, however, want to either get paid something back to offset any losses or they want to write the file off as uncollectable. They can do either of these under the Bankruptcy and Insolvency Act (BIA).
The BIA allows CRA to participate in a bankruptcy proceeding on the same footing (pari passu) as all other unsecured creditors (with a few exceptions). But they rarely initiate petitioning someone into bankruptcy. It is provided for by the BIA, but it almost never happens.
Instead, CRA are happy to, as mentioned, participate in a voluntary bankruptcy proceeding made by an individual or business when they are notified of its filing. They submit a proof of claim to the trustee as all other creditors are invited to do. If there are assets the trustee can realize upon in the bankruptcy estate, CRA may get a priority claim according to a scheme of distribution under s. 136 of the BIA for certain types of taxes owing.
But that is a far cry from petitioning somebody into bankruptcy. Taxes owing are quite common – in fact, out of all our insolvency filings (bankruptcies and proposals) – approximately 55% have tax arrears involved. Yet a petition into bankruptcy is something that rarely happens in practice despite its provision in the BIA. CRA will quite often, however, suggest to a delinquent tax debtor that they contact a trustee to learn of their options. So they will actually direct people to us and other trustees since they see no way of collecting on the tax debt owed. In a bankruptcy or a proposal, CRA may stand to at least recoup a return of some kind.
One way that a person CAN be ‘forced’ into bankruptcy is by having a Division 1 Proposal rejected by the creditors or by the court. In that case, one is deemed bankrupt. But a Div. 1 proposal is also uncommon since the debtor must have over $250,000 owing in total unsecured debt to file one. Most proposals filed, as a result, are Consumer Proposals (Div. II), under which a rejection by creditors simply means the proposal does not go ahead and the debtor is back on their own, with creditors’ rights revived.
So not only are petitions (‘forcing’) into bankruptcy very rare these days, but CRA are actually much more likely to suggest those with tax arrears talk to a trustee to make a voluntary filing, either a bankruptcy or, if they can, a proposal. CRA is a creditor, correct, but they also recognize when a tax debtor is in a situation where they are unlikely to be able to pay. That’s not to say that CRA are simply benevolent to all tax debtors across the board (far from it), but it’s to make the point that there is little chance of having them petition one into bankruptcy. There is much MORE chance of having them act to collect, either by a lien or a garnishee on wages, if one does not file a personal insolvency. Which means if you are in serious tax debt, you should speak to a trustee as soon as possible to learn your options for dealing with that situation.