When a Canadian taxpayer is assessed for Canadian income taxes owing, there is a limited amount of time within which they can file a Notice of Objection to the tax assessment if they disagree with the amounts owing. If a taxpayer fails to file the income tax Objection and has a balance owing, their file will be forwarded to a Collections Officer at the Canada Revenue Agency ("CRA"). Unlike normal collections agencies, Canada's Income Tax Act gives the CRA's Collections Officers a number of powers that often take taxpayers by surprise. Bank accounts can be seized and money taken without a court order and before a tax debtor even has time to react. This article will explain some of the most common methods and powers used by the CRA's Collections Officers.
Initial Collections Activity
Collections Officers will often begin with threatening phone calls to the taxpayer in a manner similar to private collections agencies. However, if this strategy bears no fruit, there are a number of different techniques that Collections Officers use prior to using their specific statutory powers under the Tax Act.
When threatening phone calls are ineffective, a step the CRA's collectors sometimes take is to make in person visits to the taxpayer's home or, in the case of a corporation, by visiting the registered offices. At this point, the Collections Officer will likely reiterate past threats if the outstanding balances are not dealt with. This method is primarily intended to intimidate the taxpayer and is, not surprisingly, shocking and scary for a taxpayer.
Despite the intimidating effect of these visits, it is important to remember that taxpayers do not need to speak directly to the CRA. In fact, section 15 of the Canada Revenue Agency's documented Taxpayer Bill of Rights, a policy statement which is binding on the CRA, states clearly that taxpayers "have the right to be represented by a person of your choice". In these types of collections cases our experienced Canadian taxation lawyers recommend that the taxpayer speak to professional tax consultants to negotiate with the income tax Collections Officers. Once a tax professional is involved, the CRA's agents will be forced to communicate through your tax lawyer and refrain from contacting you personally.
Although CRA Collections Officers may not make it obvious to the taxpayer who owes a tax debt, generally speaking they have an obligation to work out an acceptable income tax payment arrangement that will allow the taxpayer to avoid undue financial hardship. Doing so involves the completion of an "Income and Expense Statement" by the tax debtor and a considerable amount of financial disclosure. As such, our Tax Lawyers always recommend that taxpayers in these circumstance obtain specialized income tax representation. An experienced Tax Counsel can help you to work out a payment plan without divulging excess personal details, and can ensure that a Collections Officer is not able to overstep their mandate.
If a collections agent has no success through the use of pressure as described above, Canada's Income Tax Act gives the CRA's Collections Officers the power to garnishee amounts owing to a taxpayer who has an outstanding balance on their tax account. When a Collections Officer knows that an amount is due to be paid to the taxpayer by a third party, they can issue a "requirement to pay" to the third party that requires the payment to be made directly to the CRA. The most common example of this is when an employee's wages are garnisheed through the employer. However, if the CRA is aware of an ongoing business relationship between the taxpayer and a third-party, Collections Officers can also demand payment to CRA in place of the taxpayer in accordance with the terms of the contract.
Seizure of Accounts Receivable
For example, the CRA's Collections Officers will often attempt to obtain internal documents of a business in order to determine if there are any outstanding accounts receivable. If a collections agent is able to identify any outstanding accounts, they will issue orders to the third-party to demand that the amounts be paid. This has the potential to seriously damage any ongoing business relationships, and of course cash flow, so our top Toronto Tax law firm advises that professional tax representation should be obtained as quickly as possible to avoid these problems.
Note that if an amount is not immediately payable to the taxpayer by the third-party, the CRA will not be permitted to garnishee and seize the funds. The most common example of this is the RRSP account. Because RRSP accounts are legally considered to be trusts, the trustee is not "liable to pay" the taxpayer until the taxpayer makes a request for the return of funds. In these circumstances, the Collections Officer can "freeze" the account, ensuring no funds can be deposited or withdrawn, however they cannot seize the funds inside.
Bank Account Seizures
On the other hand, Collections Officers can seize funds in regular bank accounts or investment accounts through the use of a requirement to pay, and do not require court authorization.
Registering a Certificate
If the above described steps do not settle a taxpayer's debt with the CRA, the next step a Collections Officer will take is to go to the Federal Court and register a certificate against the taxpayer for the outstanding debt, plus any penalties and interest that are applicable. The Collector can go to the Federal Court to obtain this certificate without notice to the taxpayer in question. Once this is done, a number of other remedies become available to the collector.
The effect of the certificate is the same as any civil judgment – meaning that it is the same as if the CRA had sued the taxpayer and won the case. Because of the nature of the certificate, the Collections Officer can then proceed to greater enforcement measures and further legal action which will be expanded upon below.
Seizure and Sale
When the techniques above do not satisfy the debt of the taxpayer to the CRA, the Collections Officers have other methods in their toolkits to enforce payment of arrears. As mentioned earlier, when a certificate is obtained in the Federal Court, it has the same effect as if the CRA had sued the taxpayer and won its case.
As such, the CRA has the power to direct the sheriff of the relevant geographical area to seize the personal property of a taxpayer and to place it up for auction. The law is unclear on whether or not notice is required to be given to the taxpayer in these circumstances, however the CRA's policy position is that no notice is required under the Tax Act. Further development in this area of the law will no doubt be forthcoming.
The CRA's Collections Officers can also secure the debt owed by the taxpayer by way of placing liens on the taxpayer's property. This is commonly the first step taken once a certificate is registered. Taxpayers who subsequently work out a payment arrangement with the Collections Officer are usually quite frustrated to learn that the CRA will often not remove the Lien until the balance is paid in full. Liens can be placed upon the taxpayer's home in the same way that a lender normally secures a mortgage. CRA may also register against personal assets such as an automobile.
Restrictions on Collections Action
Normal CRA internal procedure is to allow a taxpayer a period of 90 days to make good on any debt stemming from an assessment before forwarding the file to a Collections Officer. This is because section 225.1 of the Tax Act prevents the CRA from taking any collections action until the end of the 90 day period.
In addition, if the amounts in question are income tax, then the CRA is prevented from taking legal action to collect the debt if the taxpayer has formally disputed the underlying assessment through the filing of a Notice of Objection or Appeal to the Tax Court of Canada.
Taxpayers should also note that Collections Officers are generally restricted by internal CRA policy from escalating legal action when a taxpayer has negotiated a mutually accepted payment arrangement. In general, once a payment arrangement has been agreed to, collections and legal action will stop until such a time as the amount has been paid or the taxpayer misses a payment. Having professional representation can ensure that the Collections Officer adheres to this policy.
An exception to the noted restrictions is if the amounts in question are "trust" funds, such as payroll remittances or GST/HST amounts, the filing of a Notice of Objection or Appeal will not stop collections action. Because of the nature of these types of taxes, formal legal advice should be obtained by a taxpayer to ensure that the CRA does not put a corporation or businessperson out of business.
Collections in Jeopardy
On the other hand, there are exceptions to the CRA's collections restrictions policies. , if the CRA believes that it's ability to collect on the amounts owing will be placed in jeopardy if the 90 day restriction period is adhered to, the Collections Officers can rely upon the jeopardy collections provisions of the Tax Act. Section 225.2 of the Income Tax Act allows the CRA to take legal action sooner and secure the debt.
In order to do so, the Collections Officer must apply to the Court for an order allowing them to circumvent the normal collections restrictions. When this is done, the Taxpayer must be given notice within 72 hours of the order being granted. If a taxpayer receives this notice, they are permitted to apply to the Court for judicial review of the decision. At this stage, taxpayers who have not yet retained counsel would be wise to do so to ensure that the CRA does not run roughshod over their rights.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.