Many people who owe a lot of tax think going bankrupt is the only answer. But consider the following case: In late 2013, we met with a person who was facing significant debt after her charitable tax credits were disallowed by CRA. Kathleen (not her real name) didn’t want to go bankrupt but didn’t think she had another option. She was wrong. Here’s how a Consumer Proposal gave her a debt payment plan she could live with.
It all started when …
Kathleen signed up for a charitable donation deduction program that promised significant tax savings for a fairly small cost. By claiming the large charitable tax credits over a three-year period – from 2006 to 2008 – she got tax refunds of over $40,000.
Unfortunately, the program was too good to be true. In 2010, CRA disallowed the tax credits and reassessed Kathleen. She appealed the disallowance, and then the interest and penalties, with no success. In an effort to collect the tax debt, CRA began to garnishee 30% of her wages (close to $1,000 from each pay cheque).
To deal with the drop in her net income, Kathleen worked extra shifts. She also used her credit cards and line of credit to supplement her living expenses. By the time she came to us 18 months later, she was exhausted and stressed. Her unsecured debt was approximately $200,000, and the tax portion was $156,000 (78%) of the total. Despite the garnishment, her tax debt had barely gone down because of the interest being charged.
Kathleen is single with no kids and minor non-exempt assets. She has a fairly high income and reasonable household expenses. These circumstances, and her tax history, made it likely that CRA would accept a reasonable settlement. We assured her that a Consumer Proposal was a possible solution to her debt problem.
We worked out proposal terms for Kathleen to pay $80,000 over a 50-month time period, interest free. The proposal, if successfully completed, would pay the creditors a net of approximately 35 cents on the dollar. After some discussions, CRA accepted. Because CRA represented more than 50% of the total unsecured debt, it didn’t matter that a few minor creditors did not accept. The proposal was approved, and Kathleen got her peace of mind back.
Did you know?
A person who owes taxes usually cannot negotiate directly with CRA to pay off less than the full amount owed (balance + interest + penalties). However, when you file a Consumer Proposal through a licensed insolvency trustee, you negotiate with the insolvency side of CRA. CRA will consider settling for less than the full amount owed in an effort to recover as much of the debt as possible.
If you’re struggling with tax debt, call us. We’ll find your best option.