It is no secret that the Canada Revenue Agency (“CRA”) has tremendous legislative power to pursue businesses and individuals who are in arrears of their tax obligations.
These powers include, among other things, the ability to freeze and garnish funds in bank accounts, garnish accounts receivable owing from customers and, with respect to an individual, garnish wages. In our practice, we have seen an undeniable increase in the number of businesses and individuals affected by CRA garnishments.
Often times, when CRA wields their powers, the business or individual is already in financial difficulty, and this is why they have fallen behind on their tax obligations.
One very effective tool to stop and remove a CRA garnishment which is available to insolvent businesses and individuals is to file a notice of intention to make a proposal (“NOI”) with a Trustee in Bankruptcy. A NOI is not bankruptcy. Under the Bankruptcy and Insolvency Act, immediately upon the filing of a NOI, a legal “stay of proceedings” is put in place. The laws in Canada are such that as soon as the NOI is filed, all creditors, including the CRA, are prevented from commencing or continuing any further action against the tax debtor. The effect will be that the garnishment is no longer effective and must be immediately withdrawn by the CRA.
When the CRA wants to “scoop” funds from a tax debtor’s bank account they must undertake a two-step process. First, the CRA must freeze the account. The second step in the process is to remove, or “scoop”, the funds from the frozen account. In our experience there may be as long as several days, if not weeks, between the time the tax debtor’s bank account is frozen and the time the funds are “scooped” by the CRA. If the NOI is filed after the account is frozen, but before the funds are transferred out of the account, and depending on the type of garnishment issued by the CRA, the funds may still legally belong to the tax debtor and will be released to the tax debtor. The delay in this two-step process provides a window of opportunity for the tax debtor to file a NOI with a Trustee in Bankruptcy. This may allow the funds in the bank account to be utilized by the debtor to make a proposal to all creditors (CRA included), and provide the opportunity for the debtor to reorganize and continue operating.