Tax payers become non-compliant with the CRA for a variety of reasons. This often leads to arbitrary assessments, garnishments, liens being registered, and other nasty business that is the source of considerable stress for non-compliant tax payers. When meeting with these non-compliant tax payers Tax Practitioners always aim to provide professional advice to help their clients. The purpose of this blog post is to recommend that you consider your client’s solvency before focusing on getting them compliant with the CRA.
Does compliance, meaning filing all outstanding returns, matter when the tax payer’s estimated tax debt (including income tax, HST, and un-remitted source deductions) becomes too large to repay? What’s the point of the tax payer incurring professional fees to accurately determine their unaffordable tax debt?
For example, a self-employed painter generates $60,000 per year of taxable net income and hasn’t filed income tax and HST returns for the past 5 years. When they sit down in your office for the first time, we recommend that you prepare a rough estimate of their tax liability. In this case:
HST = $39,000 + Interest/Penalties ($60,000 x 13% x 5 years)
Income Tax = $60,000 + Interest/Penalties ($60,000 x 20% x 5 yrs)
Total Tax Debt = $99,000 + Interest/Penalties
Consider all forms of taxes, interest, and penalties. If the estimated liability results in the tax payer being insolvent, meaning their assets are worth less than their liabilities or they have negative net income on a monthly basis, then skip the compliance efforts and send them to a Licensed Insolvency Trustee.
“But Steve, won’t I lose a client this way?” says the Tax Practitioner. The answer is usually “No.”
Filing a Consumer Proposal or Bankruptcy erases tax debt, but not the individual’s ongoing responsibility to file returns and pay tax. This order of operation focuses on getting the tax payer solvent first, and compliant with the CRA second. This way the client’s tax debt is dealt with, the tax practitioner is viewed favourably by the tax payer for their adept referral, and the tax practitioner obtains a solvent, debt free client with a fresh start who will need their service on an on-going basis. New record keeping and reporting systems can be implemented on day one to avoid similar non-compliance from ever happening again, and the tax practitioner has a higher likelihood of avoiding non-collectable accounts receivable.
Refer to our services pages for more information on either Bankruptcy or Consumer Proposals to learn more about them individually, and never hesitate to call us if you have a client that may benefit from our services. We never charge up-front fees, and are always happy to provide free consultations via telephone or in person at any of our many convenient locations across Ontario.