TAX SURVIVAL FOR CANADIANS
Stand Up to the CRA
Dale Barrett, Tax Lawyer
Self-Counsel Press
(a division of)
International Self-Counsel Press Ltd.
USA Canada
Copyright © 2013
International Self-Counsel Press
All rights reserved.
INTRODUCTION
For those who follow the tax golden rule: If a taxpayer always files his or her tax returns honestly, perfectly, and on time, keeps all supporting documentation, and pays all his or her taxes when due, the person need not fear the Canada Revenue Agency.
For all others: Beware.
Canada’s tax laws are very powerful and the way in which these laws are applied may have very serious consequences for a taxpayer. The outcome is sometimes fair, and sometimes not. And due to the great power bestowed upon the Canada Revenue Agency (CRA), there is a great possibility that tax laws can be used to oppress taxpayers.
Lord Denning, a famous and influential English judge, said of tax legislation that it is “… drawn so widely that in some hands it might be an instrument of oppression. It might be said that: honest people need not fear: that it will never be used against them … that is an attractive argument, but I would reject it. Once great power is granted, there is a danger of it being abused.”
Recently I spoke to a taxpayer who, like many other Canadians, operated a small corporation with three employees who worked with the owner and his wife. The corporation performed oil field consulting services in the oil sands of Northern Alberta for 15 years. The corporation had a tax debt of approximately $200,000 and with its current contracts it would have been able to pay the entire debt off within a year or less. Unfortunately for the corporation, its three employees, and its husband and wife owners, the cry for help came too late. By the time I provided a preliminary consultation, the corporation was in the midst of closing down.
Despite the fact that the corporation had been generating a profit of more than $25,000 per month after all employees and expenses were paid, and would have easily and quickly been able to pay off its tax bill, a number of things had gone wrong. The tax debt had been accumulating over a number of years, but the corporation was able to weather and survive various recessions which had caused many other businesses in the oil industry to fail. With the sharp rise in oil prices, the corporation was finally gaining strength and over the year prior to my consultation with the taxpayer, the corporation had been able to reduce its tax debt from $425,000 to less than half of that; however, this was not good enough for the Canada Revenue Agency (CRA). The CRA wanted the debt paid off in full and the collections agent would not wait any longer.
Within a one-week period, the director of the corporation had discovered that the corporate bank account was frozen, and that all remaining funds had been taken by the CRA. Further, he learned that the CRA would be giving him 30 days in which to pay off the debt in full. Unfortunately because the corporation was in trouble with the CRA, the banks would not lend any funds to pay off the debt, and the director of the corporation was forced to comply with a number of harsh demands made by the CRA in order to arrange a payment plan for the outstanding debt and to have its bank account unfrozen.
These demands included providing bank statements and credit card statements for the three previous months as well as financial records, an accounts receivable listing, and the names of all corporate clients. The taxpayer was told that this information had to be provided in order to prove to the CRA that the corporation could afford the $20,000 per month payment plan that had been proposed by the director. The collections agent promised that the information from the taxpayer would only be used to verify income and determine ability to pay, and the taxpayer thought it would be best to fully comply with the request. By cooperating with the CRA, the taxpayer provided information which was ultimately used against the corporation.
By the time I had spoken to the taxpayer, the CRA had already send a letter to each of the corporation’s five clients advising them that if they owed any money to the corporation that they were required by law to remit it to the CRA instead of to the corporation. This effectively blocked any payments to the corporation from its clients.
Within days of being provided with the client list, the CRA had effectively stopped the flow of all funds to the corporation, leaving it without the means to pay employees or purchase fuel for its trucks. Further, these letters damaged the corporation’s reputation severely within the industry, and out of fear that the corporation could no longer deliver services effectively, four of its five contracts were cancelled within days. By the time the CRA had released the corporate bank account, there was no more business to be had, there were no employees left to fulfill the remaining contract, and there was a husband and wife team who had already remortgaged their home in order to help their business during the rough times.
Within a few weeks the couple started missing mortgage and vehicle payments, and within a few short months they lost their home and one of their two vehicles, and had to sell virtually everything they owned in order to survive.
The corporation was forced to shut down, and since the tax debt was primarily GST and payroll source deductions, as directors of the corporation, the couple was faced with the director’s liability claims causing a brand new collections agent at the CRA to pursue them personally for the debt.
Ultimately after the corporation closed, the taxpayers obtained employment working for companies in their industry. But after they were personally assessed for the corporation’s debt, and after their wages were garnished by 40 percent to pay the CRA, they had no choice but to declare personal bankruptcy and end the torment.
At the end of the day, following the freezing and emptying of the corporate bank account, which resulted in approximately $13,000 of the tax debt being paid, and following the closure of the corporation, the loss of five jobs, and the personal bankruptcies of the two directors, the CRA never received another dime of the $200,000 in outstanding taxes, which otherwise would have been paid within the year.
This is not a unique story. This happens every day in every province and territory across Canada.
In order to understand the CRA, you must familiarize yourself with the structure of the CRA, the mechanics of filing taxes, and the complexities of dealing with the CRA’s employees. Without understanding the basics, many of which are outlined in this book, you should not expect to succeed in defending yourself against the CRA. However, understanding the basic mechanics of the CRA is not enough. What most people do not realize, and why many people find it frustrating to deal with the CRA, is that in order to really understand it, you must realize that while it is governed by laws and rules, it is run by people and their personalities which are not always consistent or fair.
To understand the CRA is to understand how its employees operate. Despite how logical you think you are, and despite how much faith you have in the Canadian government, if you have not dealt with the many hundreds of collections agents within the CRA, you will have virtually no chance at predicting what they will do next or how they are motivated. This is because they don’t operate the way collections agents in the real world operate. They do not receive a commission for taxes collected, and thus by and large, do not really care if the tax debt is actually collected by the CRA. Instead, a great many collections agents are more concerned with closing a file quickly than they are concerned with collecting the debt — even if it means forcing a taxpayer into bankruptcy.
To be able to understand the CRA employees, and in order to effectively deal with the agency — especially