Corporate insolvencies involving Canada Revenue Agency (“CRA”) debts have been increasing for several years. Up until the outbreak of COVID-19, CRA utilized their extraordinary investigation and collection powers with ever increasing vigour.
Will the era of COVID-19 make CRA more amenable to viable settlements of tax liabilities? And, if so, how can a settlement negotiated under the Proposal provisions of the Bankruptcy and Insolvency Act (“BIA”) be of benefit to companies.
Why Tax Driven Insolvencies Increased prior to COVID-19:
We have seen a significant increase in the number of businesses seeking assistance as a result of CRA assessments or accumulation of CRA liabilities: whether it be HST, Payroll Deductions or Income Taxes.
This increase results from a combination of factors:
- CRA’s monitoring and “red flag” systems continue to be improved and utilized;
- CRA’s ability to identify unreported income has increased proportionately with the shift away from cash transactions to electronic (traceable) transactions;
- Prior to COVID-19, CRA allocated additional resources towards tax compliance and collection and had been utilizing their extraordinary assessment and collection powers with increasing vigour;
- Many of the new generation of self-employed individuals (participating in the often termed “GIG” economy), are not having taxes deducted at source or remitting HST or paying tax instalments;
CRA’s Extraordinary Collection Remedies:
CRA has an array of legal remedies to collect upon unpaid taxes. Some of the more extraordinary remedies are:
- Garnishment of bank accounts;
- Issuing “Requirements to Pay” to a company’s customers, wherein the customers are directed to pay their accounts payable directly to CRA;
- Registering liens against all or any part of a corporation’s assets;
- Assessing the officers and directors personally for the HST and/or payroll deductions liabilities of their corporations.
Unfortunately, companies often do not approach us for assistance until after CRA has exercised any one of these extraordinary remedies. Once CRA has reached the point of garnishing bank accounts or issuing Requirements to Pay to customers, the unnecessary damage to the company’s reputation, cash flow, and to its ability to continue operating can be immense.
Why can a BIA Proposal be the most practical process for negotiating with CRA:
The proposal provisions of the BIA permit a business to have legal protections against creditors, including CRA, and to continue to carry on business pending the vote by the creditors on the company’s formal offer of repayment (the “Proposal”). A Proposal can provide for payment of all, or more often, a portion of the amounts owing over a period that usually ranges between one to five years.
A Licensed Insolvency Trustee, such as our firm, assists in the preparation and filing of all the required statutory documents, including the Proposal to creditors, and assists the company in negotiations with CRA and other creditors.
Proposal proceedings offer substantial protections to businesses against collection actions by CRA and other creditors pending the formal vote on the Proposal:
- A legal Stay of Proceedings is affected against CRA and all other creditors;
- CRA is prevented/stayed from issuing Garnishments or Requirements to Pay, from registering liens and from pursing the directors for the tax debts of the corporation;
- CRA, and all other creditors, are also stayed from continuing to charge interest: – In Proposals, where repayment may be made over a period of years, this can be a substantial benefit.
There are several other reasons why a Proposal can be of even greater assistance in arriving at a viable settlement with CRA:
- Once a company commences the formal Proposal process, a new CRA collection officer almost always takes over carriage;
- This new collector will naturally have a fresh outlook and perspective;
- The new collector is mandated to focus more on finality/settlement versus enforcement – this makes negotiations with CRA much more productive;
- In most circumstances CRA will generally accept a repayment plan over a period of between one to five years, and additionally agree to a reduction of penalties, interest and pricipal amount of tax owing (footnote 1).
How Might COVID-19 Influence the Timing to file Proposal Proceedings?
At the present time CRA have diverted their efforts away from compliance and collection and instead are focused more on helping businesses avoid bankruptcy during the COVID-19 outbreak.
This will not last indefinitely. CRA will soon be under increasing pressure from the government (and the general public) to collect the unpaid taxes of businesses who have survived through the COVID-19 crises.
We strongly encourage any company who was struggling with accumulated CRA debt prior to COVID-19 to commence negotiations for repayment now, while CRA remains focused on keeping businesses alive.
We are often asked the question “How can my business do a Proposal at this time, when we have no certainty yet as to what the company can afford to repay or even when repayments can start.”
It is not necessary for a company to know what their Proposal will be prior to commencing the proceedings. In fact, after starting the Proposal proceedings, a company can have up to six months to negotiate the final terms of the Proposal to be voted upon by the creditors.
About the Authors:
Joe Albert and Bryan Gelman are the founding principals of Albert Gelman Inc., a boutique firm of Licensed Insolvency Trustees and Chartered Insolvency and Restructuring Professionals, situated in the Greater Toronto Area.
Both Bryan and Joe have acted for numerous business owners, spanning the gamut of the Canadian economy, as well as most of the Canadian Schedule “A” banks and other lending institutions.
If you are the principal of a company that has CRA arrears that cannot be repaid from future cash flow or equity injection, or you are a professional advisor to such a client, please contact Joe Albert or Bryan Gelman directly and we will be happy to discuss if a Proposal under the BIA may be a viable option.
 The BIA provides that unremitted payroll deductions must be repaid in full within 6 months, unless CRA agrees otherwise. It has yet to be seen if CRA may be more flexible on payroll deduction arrears in the era of COVID-19.