In a previous article (Eliminate Tax Debt in Canada), I explained how Bankruptcies and Consumer Proposals have legally released countless Canadians from the crushing burden of their tax debt, while, at the same time, leaving their retirement savings intact. In this article, I will explain how the Canada Revenue Agency (CRA) may react to a Bankruptcy or a Consumer Proposal, and what the Bankruptcy Court may decide.
CRA and Bankruptcy
Like all creditors, CRA has the right to oppose a taxpayer’s discharge from Bankruptcy and ask the Bankruptcy Court to decide the outcome. However, CRA usually does not oppose a bankruptcy. CRA is more likely to oppose a Bankruptcy if the tax debt is large or if the taxpayer has engaged in some bad behavior, like failing to file tax returns, tax evasion, evading CRA collectors, fraud, etc.
If CRA opposes a Bankruptcy, then a Court hearing is scheduled. This hearing is called a “discharge hearing.” Even if CRA does not oppose a Bankruptcy, the rules require that a discharge hearing be scheduled when the income tax debt is more than $200,000 and 75% of the total debt.
Taxpayers have the right to legal counsel, and some taxpayers retain legal counsel to assist them at their discharge hearing.
Debt settlement negotiations with CRA
Prior to the discharge hearing, CRA may be open to settlement negotiations with the taxpayer and the Insolvency Trustee. CRA often agrees to allow the taxpayer to be discharged from their Bankruptcy after, for example, they pay some money to the Trustee and remain current with their post-bankruptcy obligations to CRA. The Bankruptcy Court must approve any settlements.
If a settlement cannot be reached, then the discharge hearing will go ahead. There is no reason to panic. The discharge hearing is not a criminal hearing, and it is not overly formal or contentious. First, the taxpayer explains his or her side of the story. The Bankruptcy Court, CRA and the Insolvency Trustee may ask questions about the taxpayer’s financial affairs. A CRA representative may also be present to explain CRA’s side of the story. Next, the taxpayer, CRA and the Insolvency Trustee recommend to the Court what they think the Court should decide. These are called the “submissions”. After hearing the submissions, the Bankruptcy Court makes a decision.
Considerations of the Bankruptcy Court
In making its decision, the Bankruptcy Court considers many factors. When the income tax debt is less than $200,000 or less than 75% of the total debt, the Court may consider:
- the taxpayer’s personal circumstances and ability to pay;
- whether the taxpayer has a long history of ignoring tax obligations;
- whether the purpose of the Bankruptcy was to avoid tax obligations;
- whether the taxpayer had an excessive standard of living; and
- whether the taxpayer failed to remain current with their post-Bankruptcy tax obligations to CRA.
When the income tax debt is more than $200,000 and 75% of the total debt, then the Bankruptcy Court will consider:
- the taxpayer’s circumstances when the tax debt was incurred;
- the taxpayer’s efforts to pay the tax debt before the Bankruptcy was filed;
- whether the taxpayer made payments to other creditors while failing to make payments toward their tax debt; and
- the taxpayer’s future financial prospects.
The Bankruptcy Court will also consider prior decisions of other courts across Canada. These prior decisions are called “precedents”, and the Court will try to follow them. In these precedents, generally speaking, the Courts required the taxpayers to:
- Remain in Bankruptcy for a certain period of time (e.g. 6 months);
- Repay between 1% and 15% of the tax debt; and
- Prove that they remained current with their post-Bankruptcy obligations to CRA.
These are called “conditions”, and they must be completed before the taxpayer is discharged from Bankruptcy.
There are cases where the Court ordered the taxpayer to pay more than 15% or refused to release the taxpayer from Bankruptcy. However, in these rare cases, the taxpayer was found to have engaged in some very bad behavior, like tax evasion or fraud. It also appears that British Columbia Bankruptcy Courts make taxpayers pay more before they are discharged than do the courts of other Canadian jurisdictions.
Consumer Proposal: An Alternative To Bankruptcy
Rather than Bankruptcy, many taxpayers file a Consumer Proposal offering to pay significantly less than their total debt over a period of time. They file a proposal because they have the ability to make payments and would rather retain more control over their assets and try to settle with CRA.
CRA is open to accepting Consumer Proposals. However, before accepting a proposal, CRA usually negotiates with the taxpayer. The Insolvency Trustee will assist in the negotiations.
Consumer Proposal vs. Bankruptcy: conclusion
Taxpayers may file a Bankruptcy or a Consumer Proposal in order to obtain significant relief from their income tax debt or HST debt; but, even if they file for Bankruptcy, the taxpayer may be required to repay money to the Insolvency Trustee before they are discharged from their Bankruptcy.
The amount that the taxpayer will repay in a Bankruptcy or Consumer Proposal is almost always significantly less than their total debt, especially when one considers the amount of penalties and interest that is avoided. Therefore, while the taxpayer may have to repay money, filing a Bankruptcy or a proposal can provide great relief from the crushing burden of tax debt.
Are you considering a Consumer Proposal or filing for Bankruptcy? Contact A. Farber & Partners for a free, non-obligation consultation, to look into all debt relief solutions that are available to you.