What to Do with a CRA Notice of Collections? A Worry-Free Guide

Receiving a Notice of Collections from the Canada Revenue Agency (CRA) can be a stressful experience. It’s natural to feel overwhelmed when faced with the possibility of tax debt and enforcement actions.

However, with the right steps, you can address the situation effectively and regain control over your finances. This guide will provide a clear roadmap to help you navigate a CRA collection notice and lay out the next steps to take.

What is a Notice of Collections?

A CRA Notice of Collections is a formal communication notifying you that you have unpaid tax debt. The CRA uses this notice to demand payment and inform you of potential enforcement actions if the debt remains unpaid.  Some of the tools in CRA’s tool belt:

• Garnishing your wages
• Seizing your assets
• Freezing your bank accounts

A Collection Notice follows previous and often varied attempts by the CRA to collect payment from you such as demand letters or phone calls. Ignoring CRA’s collection actions can escalate the situation rapidly, so we its good advice to talk to the CRA agent when they call to let them know you are at least aware of the debt.

Recommended Reading: Collection Agency Calling? What Can You Do to Stop the Calls?

What to Do When You Receive a Notice of Collections from the CRA.

1. Don’t Panic, but Act Quickly

• While the notice may seem intimidating, it’s important to stay calm and take immediate action to avoid harsher penalties.
• If you are unsure what the Notice means or if you have difficulty understanding the calculations, call CRA help desk to ask for clarification.

2. Review the Notice

• Check the details, including the amount owed, the deadline for payment, and any instructions provided. Confirm that the notice is genuine and not a scam.

3. Assess Your Financial Situation

• Take stock of your current finances to determine if you can pay the debt in full or require an alternative approach.

4. Contact the CRA

• Open communication with the CRA can prevent enforcement actions. They may be willing to work out a payment arrangement based on your financial circumstances.
• The CRA makes notes in your file when you call, also an open dialogue is often a good first step.

Making a Plan and Paying CRA Debt

The CRA offers options to help individuals resolve tax debt. Here’s how to approach it:

1. Payment Plans

• If you can’t pay the full amount immediately, the CRA may allow you to make payments over a period of time. Suggest a plan that fits your budget to avoid further penalties.
• It is our experience that the CRA will allow you to pay for what is owed over a 12-month period. If your debt cannot be paid off in full over this time, alternative arrangements may have to be made with your CRA agent.

2. Seek Professional Help

• If your debt is too much to pay in a reasonable amount of time, then formal insolvency advice and options may be your best solution.
• A Licensed Insolvency Trustee (LIT), like C.E. Craig & Associates Inc., can guide you through available solutions, including a Consumer Proposal. This legally binding agreement lets you settle your debt for less than the full amount owed.  And it stops the CRA from levying additional interest and penalties.

3. Consider Borrowing

• Some people choose to consolidate their debts or borrow funds to pay CRA. However, this should be approached cautiously, as it may lead to additional financial strain. (Learn more about Debt Consolidation Here!)

What Happens if You Ignore the CRA Collections Notice?

Failing to respond to a Notice of Collections from the CRA can lead to severe financial and legal consequences. The CRA has considerable authority to recover outstanding debts, and once a file is escalated, the agency can enforce various measures.

1. Wage Garnishments

The CRA has the authority to garnish wages directly from your paycheck.

How It Works:

• The CRA sends a Requirement to Pay notice to your employer, instructing them to deduct a portion of your earnings and send it directly to the CRA. Generally, garnishment requirements start at about 30% of your net pay.  If CRA is particularly cranky or if your debt is significantly larger, they can garnish at a higher rate (there have been cases where CRA garnished a debtors income 100% – which is very rare, but it can happen).

Impact on You:

• Garnishments will reduce your take-home income, making it harder to cover everyday living expenses like rent, groceries, or utilities.
• Employers are legally obligated to comply, which could create awkwardness or embarrassment at work.  And your employer will know that you are struggling with debt issues.

Duration:

• The garnishment continues until the debt is fully paid, unless you negotiate a settlement or payment plan with the CRA.

How to Address It:

• You can stop wage garnishment by arranging a repayment plan or seeking protection through a consumer proposal or bankruptcy filing, which immediately halts CRA enforcement actions.

2. Asset Seizure

The CRA has the authority to seize and sell your assets to recover unpaid tax debt. This includes property, vehicles, or other valuable possessions.

How It Works:

• The CRA registers a lien on your assets, such as your home or car, making it difficult to sell or refinance these assets without first satisfying the debt.
• In BC, CRA can file what is essentially a mortgage on title to real property (like your home) and this debt will sit there collecting interest until CRA is paid in full.  Even after a bankruptcy or a consumer proposal is filed, this type of lien on real property is not discharged until the debt is paid, or when the property is eventually sold.
• For assets like vehicles, If the debt remains unpaid, the CRA may proceed with a seizure and sale, where your property is forcibly taken and sold at auction to cover the outstanding tax debt.

Impact on You:

• Losing critical assets, such as your primary residence or vehicle, can disrupt your life and financial stability.
• The CRA often sells assets at auction which may mean that the best market value was not achieved, leaving you without fair compensation for the loss.

How to Address It:

• Before the CRA seizes your assets or registers a lien on your home, you can negotiate a payment plan or work with a Licensed Insolvency Trustee to protect your property under a consumer proposal or bankruptcy.

3. Bank Account Freeze

Freezing your bank account is another powerful enforcement tool the CRA can use to recover tax debts.

How It Works:

• The CRA sends a Requirement to Pay notice to your bank, instructing them to freeze your account. This action can occur without warning other that a collection notice to you.
• Any funds in your account are held and redirected to the CRA to pay off your debt.

Impact on You:

• You lose access to your money, including funds needed for essential expenses like rent, mortgage payments, or groceries.
• Preauthorized payments and checks may bounce, leading to additional fees and damaged relationships with creditors or service providers.

Duration:

• The freeze remains in effect until the debt is paid in full or alternative arrangements are made with the CRA.

How to Address It:

• If your account is frozen, it’s critical to act quickly. Contact the CRA to discuss repayment options, or seek professional advice from a Licensed Insolvency Trustee to explore legal protections that can lift the freeze.

Facing Tax Debt Challenges? Here’s What to Do

If you’re grappling with tax debt and the pressure from CRA collections, it’s important to know you’re not alone and there are practical steps you can take to resolve the situation.

Thankfully, personal tax debt in BC, including GST debts, are debts that can be eliminated formally (and generally treated just like all other personal debts) through formal insolvency proceedings like a personal bankruptcy or consumer proposal.

Before proceeding with a formal insolvency filing, you may want to try the following to assist you with paying your CRA debt.

1. Understand Your Financial Situation

Before taking action, assess your financial standing thoroughly:

• Create a Budget:
  • Outline your monthly income and expenses to determine what resources you have available to address your debt.
  • Factor in your essential expenses like housing, utilities, and groceries to ensure you prioritize necessities.
• Review Your Tax Debt:
  • Confirm the amount you owe to the CRA by reviewing the notice or contacting them directly.
  • Verify the accuracy of the debt, as errors can occasionally occur.

This step helps you approach the situation with clarity and enables you to explore realistic repayment options. Check out other budgeting tips here.

2. Contact the CRA to Discuss Repayment

Open communication with the CRA can help you avoid further enforcement actions:

• Payment Arrangements:
  • If you’re unable to pay the full debt upfront, propose a payment plan that suits your budget.
  • The CRA is often willing to accept regular installments if you demonstrate a genuine effort to repay.
• Delay of Collection (Financial Hardship):
  • If you’re experiencing financial hardship, the CRA may temporarily delay collection actions.
  • You’ll need to provide proof of your financial situation, such as income and expense statements.

Being proactive and transparent with the CRA shows goodwill and can make them more amenable to flexible arrangements.

3. Explore Debt Consolidation Loan with Your Bank

Debt consolidation involves combining multiple debts into a single payment, often with a lower interest rate:

• Personal Loans or Lines of Credit:
  • If you qualify, using a loan or line of credit to pay off your CRA debt can simplify repayment.
  • Ensure the new terms are manageable to avoid creating additional financial stress.
• Cautions:
  • This option works best for those with good credit and stable income, as high-interest rates on unsecured loans could worsen your financial situation.

4. Seek Professional Guidance from a Licensed Insolvency Trustee (LIT)

When CRA tax debt becomes overwhelming, consulting a Licensed Insolvency Trustee (LIT) can provide invaluable guidance. LITs like C.E. Craig & Associates Inc., are federally regulated professionals who specialize in debt relief options such as a:

Consumer Proposal

• A consumer proposal is a legal agreement to repay a portion of your tax debt, typically over a five-year period.
• This option immediately halts CRA collection actions, including wage garnishments, asset seizures, and a bank freeze.
• It allows you to keep your assets while resolving your debt for less than the full amount owed.

Bankruptcy

• Filing for bankruptcy is an option for individuals with unmanageable
• Bankruptcy also stops CRA enforcement actions and provides a structured process for resolving your debts.
• The vast majority of CRA tax debts are discharged in a formal insolvency proceeding. There is a specific exception for personal income tax debts that total more than $200,000.  If this applies to you, then the best bet is to talk to your LIT who can review your individual situation.

Both solutions protect you from aggressive collection actions, stops ongoing penalties and interest, and provide a clear pathway to financial recovery.

5. Leverage Taxpayer Relief Provisions

The CRA offers Taxpayer Relief Provisions to individuals facing extraordinary circumstances. These provisions can reduce or waive penalties and interest under specific conditions:  “CRA Fairness Applications”

• Eligibility Criteria:
  • Financial hardship
  • Medical issues or serious illness
  • Natural disasters or other uncontrollable events

To apply, you’ll need to submit a Form RC428 (Request for Taxpayer Relief) along with supporting documentation.

Recommended Reading: What Assets Are Exempt From Personal Bankruptcy?

Facing tax debt challenges can feel daunting, but taking proactive steps and exploring all available options can lead to relief. Whether it’s negotiating directly with the CRA, consolidating your debts, or seeking legal protections through a Consumer Proposal or bankruptcy, help is available.

At C.E. Craig & Associates Inc., our experienced Licensed Insolvency Trustees can help you evaluate your situation and determine the best way forward. Contact us today for a free consultation and take the first step in your journey toward financial freedom.

Take the first step, contact us now for a free consultation!