Dancing with the Taxman – Proposals to Canada Revenue Agency

You can often make a deal with the Canada Revenue Agency (CRA) for taxes you owe. You can either negotiate payment terms or file a Consumer Proposal under the Bankruptcy and Insolvency Act (BIA) rather than filing for bankruptcy.

If you owe CRA and cannot pay the balance in full, you can explain your financial situation to negotiate a payment plan. If you are unable to successfully negotiate terms,CRA may take further action against you to collect the taxes owing by withholding your tax refunds and HST Credits, garnish your wages, take funds from your bank account and/or place a lien on any real property you own until your debt is paid in full.They do not have to go through the Courts so they can act very quickly.

You will be relieved to hear that CRA will consider a reduction on your tax debt through a Consumer Proposal. CRA will not negotiate an informal offer with you on the principle amount owing unless you file a Consumer Proposal. This will ensure to CRA that you have disclosed all of your assets, and that all debts are being treated equally.

A Consumer Proposal is a legal process under the BIA that enables you to make an offer to all creditors to modify your payments or to pay them a percentage of what you owe. A proposal allows you to have a fresh start without going bankrupt.

There are several things to consider before making a Consumer Proposal to CRA.  A major success factor in dealing with CRA is communication.  You must have all of your tax returns filed and up to date prior to making an offer.  It is CRA’s mandate to ensure all tax returns are filed and that you are in compliant with the IncomeTax Act. CRA will require detailed information on your financial situation, the causes of your difficulties and the steps taken by you to get back on solid financial ground. CRA needs to be convinced that you have not been abusing the process, that the proposal is the best deal possible and that it will result in a greater return than CRA would realize in a bankruptcy.

In addition, there are a number of provisions required in a proposal prior to its acceptance by CRA:

  1. Income tax installments and returns will have to be kept current going forward; and
  2. If applicable, HST collected and payroll taxes deducted will have to be remitted on a timely basis going forward; and
  3. If applicable, payroll source deductions in arrears are required to be paid within 6 months after the approval of the proposal by the court, or within a timeframe mutually agreed to by CRA.
  4. In some cases, CRA may require additional terms.  

When making an offer to CRA, you must offer them more than they would receive in a bankruptcy situation. CRA will often start negotiating from the standpoint of being paid “100 cents on the dollar” of what it’s owed. This of course is unrealistic given the financial circumstances of most tax debtors. The return expected by CRA will vary depending on your financial circumstances.  It is essential to put one’s best foot forward at the start by submitting a proposal that is fair and reasonable in your circumstances.  Figuring this out on your own can be complicated.  At Doug Lee& Associates Inc, we will work out the numbers for you and ensure that the proposal is fair and reasonable.  Give us a call for a free consultation, we would be happy to assist you with a new financial beginning.

Surplus income in Bankruptcy

When you make an assignment into bankruptcy, you are required to make a surplus income payment, a contribution to your estate, each month based on your income.  Somewhat of a confusing term, as surplus income is based on your net take-home pay on a monthly basis and not based on what available funds you may have left after you pay your monthly bills.  The more you earn above the established limits, the more you are required to contribute.  Surplus income is accumulated in a trust account and dispersed amongst all your creditors at the end of the process. 

Here are the income limits set for 2012, based on your family size:

          Family Size          Limit

                1                 $1,980
                2                 $2,465
                3                 $3,031
                4                 $3,680
                5                 $4,174
                6                 $4,737
                7+               $5,241

 As an example, a single person in 2012 is allowed to have take-home pay each month (income after taxes) of $1,980. For every dollar their income exceeds this limit in a month, they are required to make a contribution of 50% of the amount they are over the limit to the trustee, in form of a surplus income payment.

If that person earned net-take home pay of $2,500 in a month, they are $520 over the limit, so they would be required to contribute $260 (which is referred to surplus income) to their bankruptcy estate for the current month.

Each month you would be required to submit proof of your net take-home pay to the trustee.  If you have proof of the following payments, you can deduct these amounts from your net take-home pay – spousal/child support payments, child care payments, medical bills, fines and employment expenses, as allowed by Canada Revenue.

The duration of your bankruptcy will be based on your surplus income requirements as follows:

  • A first time bankrupt with no surplus requirement is entitled to an automatic discharge in 9 months.  If you have $100 or more in surplus requirements, you will be bankruptcy for 21 months.
  • A second time bankrupt with no surplus requirement is entitled to an automatic discharge in 24 months.  If you have $100 or more in surplus requirements, you will be in bankruptcy for 36 months.
  • A third (or more) time  bankrupt would be required to go to bankruptcy court, and the bankruptcy court will decide how long you would be in bankruptcy (quite possibly for more than three years if you have excess earnings).
  • A bankrupt who has debt owing to Canada Revenue Agency in excess of $200,000 is not eligible for an automatic discharge.

If you require additional information, please contact us for a free consultation.  During the process, we would calculate your surplus income.  The most important thing to understand is what your limit is, so you can estimate the cost of your bankruptcy.  For further information, you can visit the website of Office of the Superintendent of Bankruptcy at www.osb.ic.gc.ca

Tips on Creating a Budget

Don’t be scared off by the “B” word. It is really just a way to organize your finances. All you need is a very simple basic budget! There is no reason to make it complicated. Your budget should be flexible and change according to your current needs.

In order to create a realistic budget, you must get an overall picture of where your money is coming from, when it comes in and what you are spending it on.

Getting Started

When starting your budget either write it on a sheet of paper or create a spreadsheet on your computer.

Get clear on your Income

First, you must make a list of your monthly income. How much money do you have to work with?

This would be your take home pay (after deductions and taxes).  Remember to include all income which can be from many sources such as – tips, child support, interest, pension etc.  If your income is irregular, you will need to average what you earn to get a monthly amount.

Keep Track of your Expenses

Next, every day for at least two or three months, you must keep track of what you buy. This will include everything from groceries, your daily coffee, to the parking meter. Write it down in a notebook or keep all of the receipts. Doing this will help you understand your spending habits and will allow you to make a budget.

Creating your Personal Budget

Based on tracking your expenses, you should establish a target for both your your fixed and variable expenses – they should total less than your income.  Fixed expenses tend to stay the same each month or pay period, such as rent, mortgage or utilities.  Variable expenses vary each pay period, such as entertainement or dining out. 

Be sure to include savings (as an expense) for an emergency fund. Set up a separate account to prepare for the unexpected such as car repairs, illness or loss of employment, unforeseen bills etc.

You should be able to set aside 10 percent of your net income for savings on a monthly basis.

Re-evaluate on a Regular Basis

Look at the different categories and decide if you are happy with how you are spending your money. Adjust expenses that you are not happy with and create a new plan. Your expenses and income will change and so should your budget.

Remember that following a budget does not mean that you have to torture yourself, you just have to be more selective your choices.  If you budget doesn’t work out exactly right the first time, don’t be discouraged.  A budget is a guide.  Always remember to review and revise your budget.  You’re on the way to a Fresh Start.