If you have a 10 year old tax debt and CRA has not contacted you to collect it then the Canadian tax department may no longer be able to collect the taxes owing, as described in more detail in this article by a Canadian income tax lawyer.
Canada's Tax Act gives sweeping powers to the Canada Revenue Agency, and by extension its tax collection officers, to collect the tax debts of taxpayers. In many cases, taxpayers are taken by surprise when their bank accounts are frozen, assets liened or seized and wages garnisheed.
However there are certain limitations on when the CRA can legally take action to collect income tax debt, which are both situational and based upon strict timeframes. This article will discuss the most common limitation periods on collections action for the Canada Revenue Agency.
Initial Limitation on Tax Collections
When a taxpayer is assessed or reassessed in the normal course, a tax debt to the Canadian tax department is legally created if there are taxes owing as a result. However, despite the fact that a tax debt has been created, there are internal limitations created by the Tax Act that prevent the CRA from taking action to collect immediately. The Income Tax Act in section 225.1 provides that the CRA can only begin collection after 90 days of the sending of notice of assessment or notice of reassessment to the taxpayer.
This initial "dead period" to collections is subject to certain specific exceptions which are beyond the scope of this article. See our article dealing specifically with the collections powers of the CRA.
10 Year Limitation Period
The Income Tax Act at subsection 221(3) provides that the CRA may not commence or continue an action to collect a tax debt after the end of the limitation period for the collection of the debt. The prescribed limitation period in the Income Tax Act is 10 years; this means that after 10 years, the Canada Revenue Agency is legally prevented from collecting on a tax debt.
However, the Tax Act also specifically allows for the Minister to extend the limitation period by virtue of subsection 221(5); the limitation period of 10 years is "reset" if the tax department carries out any action to collect the tax debt, such as sending out a demand to pay letter. Also, if the Minister assesses any third-party in respect of the tax debt, for example a spouse or relative by way of derivative assessment , then the limitation period is reset. In addition, if the taxpayer (or the taxpayer's legal representative) acknowledges the debt, the 10 year limit will again reset.
For a more complete example of how the limitation period works, if a tax debt is assessed in 2005, and the CRA takes consistent collections action against the taxpayer until 2015, the Minister has 10 more years from the last date of collection action in 2015 to attempt to collect upon the debt. Essentially, every time that the tax collectors continue with collections action, the 10 year limitation period 'restarts'. If there is no collection action for a period of 10 years plus one day, no taxpayer (or taxpayer's legal representative) acknowledging the debt in the past 10 years, and no derivative assessment is issued against a third-party, the CRA will be statute barred by the 10 year limitation period to continue or restart collection action.
However, quite confusingly, all tax debts owed to the CRA before March 3, 2004 were 'awakened' by virtue of the addition of subsection 221(10) of the Income Tax Act. This means that all the tax debt owed to the Minister before March 3, 2004, at the very earliest, may expire on March 3, 2014. If any action was commenced during this period before March 3, 2014 for the debt owed before March 3, 2004, then the 10 year limitation period will have been reset.
The 10 year limitation period has not always been the law. Prior to the enactment of subsection 221(3) of the Tax Act, section 32 of Crown Liability and Proceedings Act governed. In normal circumstances, unless otherwise prescribed by Acts of Parliament, the Crown has a limitation period of 6 years to pursue any claims against any person. This 6 year limitation period was affirmed by the Federal Court of Appeal in Markevitch v The Queen, 2001 FCA 144 in 2003, to apply to tax debt collection by the Crown because there was no prescribed limitation period by the Income Tax Act. However, section 221(3) of Income Tax Act was added by the Parliament in May 2004, in direct response to the Markevitch case, to set the limitation period for collection of tax debt to 10 years. Thus, income taxes now have their own separately enumerated limitation period.
What Constitutes Collection Action?
Defined by section 222(1) of Canada's Income Tax Act, a collections action means any action taken to collect a tax debt of a taxpayer. This can include a proceeding in a Court and any action taken by the Canada Revenue agency collectors under subsections 129(2), 131(3), 132 (2) or 164(2), and section 203 of the Income Tax Act:
- Subsection 129(2) of Income Tax Act allows the Tax Department to, instead of making a dividend refund to a corporation under subsection 129(1), to apply the refundable amount to the existing tax liability of the corporation and notify the corporation of that action. This means that applying a dividend refund to a corporation's tax liability constitutes a collection action, which restarts the 10 year limitation period for the corporate tax debtor.
- Subsection 164(2) of Income Tax Act allows the CRA to, instead of making a refund to a taxpayer under the refund section of the Income Tax Act, (s. 164) apply the refund amount to the taxpayer's (existing or soon to be) tax liability or any liability owed to the Federal or Provincial government and notify the taxpayer of that action. This means that applying a refund to a taxpayer's tax or government liabilities constitutes a collection action, which restarts the 10 year limitation period for the individual tax debtor.
What other things can the Minster to do collect?
Other than withholding a refund and applying the refund amount to the taxpayer's tax debt, there are various other collection mechanisms enumerated in the Tax Act that provide the Canada Revenue Agency with an extensive range of remedies to recover debts.
Pursuant to subsection 223(2) of the Income Tax Act , the CRA may certify an unpaid tax amount and register a certificate in the Federal Court by virtue of subsection 223(3) [the "section 223(2) certificate"] without notice to the taxpayer. The certificate will be deemed to be a judgment of that court. The Federal Court can then issue a certificate, notification, or writ evidencing the section 223(2) certificate, which can be used by the Collections Officer to create a charge, lien, priority, or other interest on property in any province, according to sections 223(5) to 223(8) . What this means in effect is that the CRA can create a registered secured interest in a taxpayer's assets without even giving notice to the tax debtor. Thus, those taxpayers hoping to avail themselves of the 10 year limitation period would be well advised to seek the assistance of one of our experienced Toronto tax lawyers who can review your file and determine what, if any, collections action the CRA has or is taking.
Under the garnishment provision of subsection 224(1), the Minister may require a third party who is indebted to the taxpayer to make payments directly to the Minister. The Minister may also order the seizure and sale of the taxpayer's goods and chattels under subsection 225(1). If the taxpayer appealed to the Tax Court of Canada, then these collection powers cannot be exercised until 90 days after the taxpayer's appeal has been finally determined by the Tax Court of Canada, according to subsections 225.1(1) to 225.1(4).
What can a tax debtor do?
The only thing that a tax debtor can do to avoid prolonging the period of collection as much as possible is to avoid acknowledging or paying the debt. Defined in subsection 221(6) of the Income Tax Act, the taxpayer can acknowledge the debt in one of three ways:
- A promise to pay the debt in writing;
- Making a written acknowledgement of the debt; and
- Making a payment or purported payment that was dishonoured such as a "bounced cheque".
Any of these three actions by the taxpayer will result in a "reset" of the limitations period, and the taxpayer will be back to square one. This is another good example of why taxpayers with debts to CRA would be well served to seek professional tax advice from one of our Toronto tax lawyers before communicating directly with Tax Collections Officers.
If you owe a debt to Canada Revenue Agency and you are unsure whether the limitation period has passed, get in touch with our expert Canadian Income Tax Lawyers. Our income tax law firm can assist you with dealing with Canada Revenue Agency collectors who can be very aggressive with their collection actions. Effective planning and strategy is necessary at all stages of the tax dispute process. Our Canadian tax law firm can give you the counsel and representation that you need to be successful in your dispute, negotiation and settlement with the Canadian Revenue Agency at each stage of the process, and help ensure you are not paying the CRA more than it is legally entitled to.
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.