What is a Notice of Collection?

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Key points covered in this post:

What is a Notice of Collection?

Understanding CRA Debt

Ways to Pay Off Tax Debt in Canada

Consequences of Ignoring a Collection Notice from CRA

With tax season in full swing, we wanted to dive into the important aspects surrounding tax debts in Canada, focusing particularly on the notice of collection issued by the Canada Revenue Agency (CRA). We’ll explore what a notice of collection entails, the various ways you can address your tax debts, and the role of a Licensed Insolvency Trustee if you find yourself unable to manage your tax obligations.

What is a Notice of Collection from the CRA?

A notice of collection is a formal communication from the CRA informing taxpayers of outstanding tax debts. It serves as a notification that the CRA intends to collect the amount owed and outlines the steps that individuals or businesses must take to resolve the debt. This letter shouldn’t come to you as a surprise as the CRA is required to make 3 attempts to give verbal legal warning by phone.

When you receive a notice of collection, it’s essential to take prompt action to address the outstanding tax debt. Ignoring or delaying response to the notice can lead to serious consequences, including additional penalties, interest charges, and potential legal action by the CRA.

Understanding Tax Debt

Understanding tax debt is essential for maintaining financial stability and compliance with government regulations. Tax debt arises when individuals or businesses fail to meet their tax obligations, resulting in unpaid amounts owed to the Canada Revenue Agency. It’s crucial to understand the specific nature of your tax debt, including the types of taxes owed, the reasons behind the debt, and any penalties or interest accrued. By gaining clarity on your tax situation, you can make informed decisions about how to address and resolve the debt effectively.

What is I Can’t Pay My CRA Debt?

The good news is, the CRA understands that life is unpredictable, and financial hiccups can happen. For those able to pay in full, that’s fantastic! But if that’s not feasible, the CRA offers alternatives if you’re unable to pay:

1. Partial Payment

If you’re unable to cover the full amount owed, you need to contact the CRA to establish a payment arrangement for the outstanding balance. This arrangement allows you to gradually settle your debt, along with any accrued interest, over a period of time.

2. Payment Arrangement

A payment arrangement serves as a mutually agreed upon plan between you and the CRA to gradually pay off your debt over a specified timeframe.

The CRA evaluates your efforts to repay the debt in full, considering whether you’ve reduced expenses or obtained funds through borrowing.

Upon assessing your financial circumstances, the CRA collaborates with you to determine the amount and duration of the payment arrangement.

When you enter a payment arrangement with the CRA, it’s very important that you fulfill your payment obligations as agreed, consistently file all tax returns on time, and remain current with your tax responsibilities. Periodic reviews of payment arrangements may occur.

Even if you have an existing payment arrangement and are making regular payments, it’s important to note that benefits and other credit payments received may be utilized to offset your CRA debt.

If your circumstances change and you’re unable to continue with the agreed-upon payment arrangement, immediate communication with the CRA is essential. Failure to do so may result in the CRA pursuing legal actions to collect the outstanding debt.

3. Taxpayer Relief Provision

The CRA possesses the authority to waive penalties and interest, as well as accept late-filed, amended, or revoked income tax elections. The also have the ability to extend income tax refunds beyond the standard 3-year period, applicable only to individuals and testamentary trusts. Taxpayer relief provisions, formerly known as fairness provisions, are subject to a 10-year time limit, meaning that requests for leniency pertaining to tax year 2013 must be submitted to the CRA by December 31, 2023.

These provisions come into play when a taxpayer or registrant encounters various circumstances, including:

  • Extraordinary events
  • Actions initiated by the CRA
  • Financial hardship or inability to pay (which can be difficult to prove)
  • Other relevant factors

4. Work With a Licensed Insolvency Trustee

In cases where the tax debt feels insurmountable, a Licensed Insolvency Trustee (LIT) can help you explore your options, including:

File a Consumer Proposal

A consumer proposal is a legal agreement that allows you to settle your debts with creditors, including the CRA, by paying a portion of the total amount owed. With the help of a Licensed Insolvency Trustee, this option provides a more structured and manageable approach to debt resolution.

File for Bankruptcy

In extreme cases, where other options are not feasible, a Licensed Insolvency Trustee can guide you through the process of filing for bankruptcy. While this is a significant step, it can provide relief and a fresh financial start for individuals facing overwhelming debt.

Consequences of Ignoring a Collection Notice from CRA

Ignoring a collection notice from the Canada Revenue Agency (CRA) can have serious consequences. If you receive a collection notice from the CRA and choose to ignore it, several potential consequences may follow:

1. Increased Debt

Ignoring a collection notice does not make the debt disappear. In fact, ignoring it typically results in additional interest and penalties being added to the original amount owed. This can significantly increase the overall debt you owe to the CRA.

2. Legal Action

The CRA has the authority to take legal action to collect outstanding debts. This can include garnishing wages, seizing assets, or placing liens on property. Ignoring a collection notice may escalate the situation to the point where the CRA pursues these measures to recover the debt.

3. Impact on Credit Score

Unpaid taxes or debts owed to the CRA can negatively impact your credit score. The CRA may report unpaid taxes or debts to credit bureaus, leading to a lower credit score. A lower credit score can make it more difficult to obtain loans, credit cards, or mortgages in the future.

4. Legal Proceedings

Ignoring a collection notice may ultimately lead to legal proceedings initiated by the CRA to recover the debt. This could involve court appearances, judgments against you, and potential enforcement actions.

5. Loss of Benefits or Credits

Failure to address outstanding tax debts with the CRA may result in the loss of certain government benefits or tax credits for which you may be eligible. For example, the CRA may withhold certain tax refunds or credits to offset outstanding debts.

Understanding a Notice of Collection and proactively managing your tax debts are essential steps in maintaining financial health. Whether you choose to address your debts directly with the CRA, explore alternative payment arrangements, or seek assistance from a Licensed Insolvency Trustee, taking prompt action is key. Remember, financial challenges can happen to anyone, and there are government-regulated debt solutions available to help you navigate through them.

If you owe money to the CRA and you’re not able to pay it back, we encourage you to book a free consultation with a Licensed Insolvency Trustee to learn about your debt relief options, make informed decisions, and regain control of your financial well-being.