Having tax debt is serious. Not only does the CRA have collection powers far greater than other creditors, but the penalty and interest on your tax debt can often exceed the tax you owe. Interest on tax debt is calculated at a prescribed rate, compounded daily, and applied retroactively from the filing due date, which can make the debt unmanageable.
Penalties can be assessed for many different reasons, including but not limited to the following:
- Late remittance/failure to remit
- Gross negligence
- Failure to file an information return by the due date
- Failure to complete the TD1, obtain employee’s SIN, or file ROE
- Third-party civil penalties
- Failure to maintain adequate records
- Failure to honour payment
If you find yourself with tax debt, you have some options to potentially reduce or eliminate the penalties and interest. Three of those options – the Voluntary Disclosure Program, a Notice of Objection, and the Taxpayer Relief Provision – are detailed in this article.
- The Voluntary Disclosure Program
The Voluntary Disclosure Program (VDP) is an official CRA program that enables taxpayers to voluntarily disclose undeclared income, inaccurate information, and incomplete information.
Individuals or businesses in Canada that would like to make a disclosure about matters such as income tax or services tax (e.g. GST/HST) may qualify for the VDP. Disclosures must involve a tax year that is at least one year old and involve the application of a penalty. In addition, the disclosure must be both voluntary and complete.
If your VDP application is approved, you must arrange to pay your tax debt in full or enter a binding payment plan with CRA.
If your VDP application is not approved, you should still arrange to make a disclosure. Failing to do so constitutes tax evasion.
It is important that you disclose only relevant and necessary information to the CRA.
- Notice of Objection
A Notice of Objection is a legal avenue under section 165 of the Income Tax Act where a taxpayer may object to an assessment made by the CRA. You can file a Notice of Objection if you disagree with some aspect of a re-assessment, or with the assessment of a penalty.
The time limit to submit an objection is the later date of the following options:
- Within 90 days of the date on the (re)assessment notice; or
- Within one year after the date of the return’s filing deadline (April 30 or June 15).
If the objection is approved, any remaining tax debt will be due in full. If you cannot pay the amount in full, you will have to enter a binding payment plan with the CRA.
If your objection is rejected, your tax debt will be due in full, and the CRA collections process will continue.
While your objection is being processed, the CRA will pause collection action against you, but the compounded daily interest on your tax debt will continue. If your objection is rejected, collection action will resume, and you will be responsible for payment.
- The Taxpayer Relief Provision
Another option to reduce or remove penalties and interest associated with your tax debt is to apply for a Taxpayer Relief Provision. Your taxpayer relief application must explain the specific circumstances that you believe the CRA should consider regarding your tax debt. While anyone can apply for taxpayer relief due to extraordinary circumstances, the likeliness of getting approved depends on how compelling your grounds for relief are and how well your claims are supported.
It is important to note that the CRA will continue to attempt to collect on your debt while processing your taxpayer relief application.
If the CRA has rejected your initial application, you may be advised to seek professional counsel before submitting the application for a second review. If an application is rejected after a second review, a judicial review involving tax court may be required, and this could get very expensive.
All of these official processes are complex; therefore, submitting your application could require the proper guidance of a tax professional. If your application is prepared properly, one of these options could reduce or eliminate the penalties and interest on your tax debt.
If you have any questions about your tax debt, be sure to consult a Chartered Professional Accountant.