CRA Cannot Force Bankruptcy for Unpaid Taxes Says Cooper & Co. Ltd

September 28, 2016 - Bankruptcy is a scary outcome for most individuals and businesses, even if it does not necessarily have to be. There are enough things to worry about regarding bankruptcy without having the looming shadow of the Canada Revenue Agency (CRA). In its latest blog post, Cooper & Co. clears up a bankruptcy myth that states the CRA can actually force bankruptcy for unpaid taxes.

In many aspects the Canada Revenue Agency is the big bad wolf, but as Cooper & Co. points out, it should be. Simply put, missing tax payments, not filing returns, and other such activities is serious, and the penalties can be harsh. The insolvency firm says the CRA comes down hard on individuals and businesses who are in arrears.

"You cannot simply opt out of paying your taxes or filing returns. Unfiled returns carry with them penalties and interest which can be very harsh, and which can grow from a minor amount owing into a very unmanageable amount in a short time.

CRA has wide powers afforded itself as a government agency. It can collect on balances owed it in many ways, and it can skip the regular process of an application to the court and all the time delays inherent in that system. CRA just bypasses the courts and can register liens on houses/property, garnishee business receivables, wages, etc."

These legal powers and no-tolerance policy have made the CRA a scary bunch. However, with this element of fear a number of myths have arisen. For example, that the CRA can force bankruptcy onto an individual or business for unpaid taxes. Cooper & Co. points out this is simply not true.

In its thought provoking blog post, the company adds that while forced bankruptcy is not possible the revenue agency does want to see some money paid back. If they do not get paid, they seek to write off the file as uncollectable. Both of these scenarios can be achieved through the Bankruptcy and Insolvency Act (BIA).

"The BIA allows CRA to participate in a bankruptcy proceeding on the same footing (pari passu) as all other unsecured creditors (with a few exceptions). But they rarely initiate petitioning someone into bankruptcy. It is provided for by the BIA, but it almost never happens.

Instead, CRA are happy to, as mentioned, participate in a voluntary bankruptcy proceeding made by an individual or business when they are notified of its filing. They submit a proof of claim to the trustee as all other creditors are invited to do. If there are assets the trustee can realize upon in the bankruptcy estate, CRA may get a priority claim according to a scheme of distribution under s. 136 of the BIA for certain types of taxes owing."

Bankruptcy scenarios
There is one way in which bankruptcy can be forced. If a Division 1 Proposal is rejected in court then bankruptcy is the conclusion. However, a Division 1 Proposal is rare because it is for debts of over $250,000 on one file. A Division 2 Proposal is the most commonly filed proposal, which does not involve evoked bankruptcy.

The simple and uncomplicated reality is that the CRA would much prefer a voluntary filing of bankruptcy, or even a proposal.

"CRA is a creditor, correct, but they also recognize when a tax debtor is in a situation where they are unlikely to be able to pay. That's not to say that CRA are simply benevolent to all tax debtors across the board (far from it), but it's to make the point that there is little chance of having them petition one into bankruptcy. There is much MORE chance of having them act to collect, either by a lien or a garnishee on wages, if one does not file a personal insolvency. Which means if you are in serious tax debt, you should speak to a trustee as soon as possible to learn your options for dealing with that situation."

About Cooper & Co. Ltd
Cooper & Co. Ltd is a Toronto Bankruptcy Trustee firm. The company has been in the debt relief industry for over three decades. Over that time, Cooper & Co. has helped over 15,000 clients to escape from debt and understand how to maintain a healthy financial state.

Cooper & Co. Ltd.
Toronto Bankruptcy Trustee
1120 Finch Avenue West
Suite 108
Toronto, ON
M3J 3H7
Canada