What is the Role of a Licensed Insolvency Trustee in Managing CRA Tax Debts?

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Owing CRA tax debts can be overwhelming, especially since it is a known fact that the federal authority does have strong collection powers to collect the debt. A Licensed Insolvency Trustee (LIT) plays a crucial role in helping debtors navigate challenges in handling outstanding taxes owed to the Canada Revenue Agency (CRA).

Recent data shows that many Canadians are struggling with overdue tax obligations. As of March 31, 2023, the CRA reported a total receivable of $207.1 billion, encompassing various tax liabilities such as income taxes, GST/HST, and COVID-19-related debts. ​The report also indicates that tax debt write-offs and enforcement actions remain a major focus by the CRA to collect the outstanding debts. Additionally, financial challenges have led many Canadians to rely on tax refunds to manage their overall debt burden.

What Are CRA Tax Debts?

They refer to any amounts you owe to the Canada Revenue Agency, which can include:

• Personal Income Tax – If you owe after filing your return.
• Self-Employment Income Tax – Especially common for freelancers and contractors who are required by the government to make quarterly tax installment payments throughout the year instead of paying everything at once when filing their annual tax return.
• GST/HST – For businesses or self-employed individuals.
• Payroll Deductions – For employers who fail to remit deductions.
• COVID-19 Benefit Repayments – Like CERB or CEBA if ineligible or overpaid.

How Do You Incur CRA Tax Debts?

Individuals and businesses can accumulate tax debts for various reasons:

• Incorrect Tax Filings – Filing errors, underreporting income, or miscalculating deductions.
• Late or Missed Tax Payments – Not paying taxes on time, i.e. not remitting quarterly tax installment payments by the due dates, which applies to self-employed individuals (and some others).
• CRA Audits and Reassessments – An audit or reassessment may uncover discrepancies, resulting in additional tax liabilities and penalties.
• Business Tax Obligations – Businesses that fail to remit GST/HST or payroll source deductions can quickly accumulate CRA tax debts.
• Over-claimed Tax Credits and Benefits – Receiving tax refunds or benefits through incorrect claims, such as ineligible deductions or excessive credits, can lead to CRA demanding repayment.
• Accumulated penalties and interests on overdue amounts.
• Unexpected financial difficulties—such as job loss, business downturns, or economic struggles—can make it hard to meet tax obligations, leading to unpaid tax debts.

What Happens If You Owe the CRA?

Unpaid CRA tax debts can lead to serious financial and legal consequences. The CRA has strong collection powers, and unlike other creditors, the CRA does not need a court order to take enforcement action, making tax debt a serious financial burden.

• Penalties & Interests – Late payments accrue additional charges, increasing the total debt.
• Wage Garnishments & Bank Freezes – CRA can seize funds directly without a court order.
• Liens & Asset Seizures – Unpaid taxes may result in property liens or forced sales.
• Credit Impact – Legal actions or bankruptcy from tax debts can damage your credit score.
• Business Disruptions – Companies with tax arrears risk account freezes and operational restrictions.

How a Licensed Insolvency Trustee Helps

A Licensed Insolvency Trustee (LIT) is a federally regulated professional authorized to administer insolvency proceedings such as consumer proposals and bankruptcies. They are licensed by the Office of the Superintendent of Bankruptcy (OSB) and ensure compliance with Canada’s insolvency laws.

LITs assist individuals and businesses struggling with debt, including CRA tax arrears, by offering legally binding solutions to reduce or eliminate tax obligations while protecting assets and financial stability.

1. Assessing Financial Situation & Exploring Options

Before recommending a course of action, an LIT analyzes the debtor’s financial position, including:

• Total outstanding CRA tax debts
• Other liabilities and income sources
• Assets and available resources for repayment

The assessment will help determine if you’re insolvent—meaning you cannot meet your debt obligations. Based on this evaluation, the LIT explains legal debt relief options, which may include negotiation with creditors, filing a consumer proposal or bankruptcy. The LIT ensures that individuals understand their options and guides them through the process.

2. Negotiating with CRA

CRA is open to negotiating tax repayment plans, but they rarely reduce the principal owed. An LIT can communicate with CRA officials to seek payment arrangements that provide more manageable terms for debtors. These may include:

• Extended repayment schedules
• Temporary relief from enforcement actions (e.g., halting wage garnishments)
• Reduction of penalties and interest

While CRA does not formally accept reduced debt settlements like private creditors, negotiating terms through an LIT can offer significant financial relief.

3. Filing a Consumer Proposal to Reduce Tax Debt

A consumer proposal is a legally binding arrangement that allows individuals to pay a portion of their debts over a set period (up to 5 years). CRA tax debts are eligible for inclusion in consumer proposals, and LITs negotiate settlement terms on behalf of the debtor.

Benefits of a consumer proposal include:

• Reducing the total amount owed
• Stopping CRA collection actions immediately
• Preventing asset seizure or wage garnishment
• Offering structured payments without accruing further penalties

A consumer proposal must be approved by creditors, including CRA, and is administered entirely by the LIT.

4. Managing Business Insolvency & Corporate Tax Debts

Businesses with unpaid GST/HST and payroll taxes face aggressive collection efforts from CRA. An LIT helps companies resolve tax debts by:

• Negotiating repayment agreements
• Exploring restructuring strategies such as corporate proposals or bankruptcy
• Liquidating assets if necessary to settle tax obligations

Incorporated businesses may file proposals or bankruptcies to address tax debts; however, directors can still be held personally liable for unpaid payroll deductions. LITs guide business owners on how to handle these complexities.

5. Personal Bankruptcy as a Last Resort

If tax debts are insurmountable, bankruptcy may be the most viable option. Bankruptcy eliminates most CRA tax obligations, except for fraud-related debts, and stops collection actions immediately.

LITs oversee bankruptcy proceedings and ensure the fair distribution of assets, if applicable, while guiding debtors through financial recovery steps.

6. Stopping CRA Collection Actions & Legal Enforcement

One of the most significant benefits of working with an LIT is obtaining legal protection against CRA enforcement. Filing a consumer proposal or bankruptcy initiates an automatic stay of proceedings, which puts an immediate stop on:

• Wage garnishments
• Bank account freezes
• Liens on personal or business assets

This legal protection allows debtors time to restructure their finances without CRA interference.

Why Work with a Licensed Insolvency Trustee?

Handling CRA tax debts without professional guidance can be extremely difficult. An LIT provides:

• Expert legal advice on managing tax obligations
• Negotiation support with CRA for better repayment terms
• Financial restructuring solutions to avoid excessive tax penalties
• Debt relief options that align with federal insolvency laws

In Canada, Licensed Insolvency Trustees are the only professionals licensed by the federal government through the Office of the Superintendent of Bankruptcy (OSB) to administer:

• Consumer proposals
• Division I proposals
• Bankruptcies

While debt consultants or financial advisors may offer guidance or budgeting help, they cannot file or manage formal insolvency proceedings under Canadian law.  Managing CRA tax debts often require formal solutions—like proposals or bankruptcy, and LITs are the most qualified and legally authorized professionals to handle them.

Whether through negotiation, structured repayment plans, consumer proposals, or bankruptcy, an LIT ensures debtors receive legal protection and financial relief. If you’re struggling with tax arrears, seeking professional assistance from an LIT can provide the best path toward resolving CRA tax debts and regaining financial stability.

Contact Richard Killen
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