Introduction
When taxpayers cannot settle their tax assessments within a reasonable timeframe, the Canada Revenue Agency (CRA) employs various tools to collect tax debts, including garnishments. Known as “Requirements to Pay” (RTPs), these garnishments enable the CRA to demand payments from third parties holding or owing funds to the tax debtor. Essentially, RTPs allow the CRA to step into the debtor’s shoes and collect amounts owed to them without a court order.
This article explores the implications of CRA garnishments, the legal process behind RTPs, and what taxpayers or third parties need to know.
Legal Basis and Process for Requirements to Pay
Under Subsection 224(1) of the Income Tax Act, the CRA can issue RTPs to any third party suspected of owing money to, or holding funds for, a tax debtor. This tool is a cornerstone of CRA’s collection methods, especially for:
- GST/HST and payroll source deductions, where RTPs can be issued immediately after a tax assessment.
- Income tax liabilities, where RTPs are only issued after the tax debtor exhausts their objection and appeal rights.
RTPs are frequently sent to banks, employers, or other entities connected to the tax debtor. Examples include:
- Banks: CRA garnishes funds from the tax debtor’s accounts. If insufficient funds are available, the account may be frozen until the RTP is resolved.
- Employers: CRA may demand that a portion of the debtor’s wages be redirected to settle tax liabilities.
- Clients or Vendors: CRA targets payments owed to the debtor for services or supplies.
Joint Bank Accounts
Although the CRA generally avoids garnishing funds from jointly held accounts, they may attempt to do so. Joint account holders should be prepared to challenge such garnishments if they do not owe tax themselves.
Consequences of Failing to Honour an RTP
Failure to comply with an RTP can result in serious consequences for third parties. Under the Income Tax Act, the CRA can issue a Notice of Assessment against the recipient who disregarded the RTP. This assessment effectively transfers the tax debtor’s liability to the non-compliant third party.
Defenses Against an RTP Assessment
A third party assessed for non-compliance with an RTP may object within 90 days. However, defenses are typically limited to:
- Establishing that the third party did not owe the tax debtor at the time the RTP was issued.
- Demonstrating that the third party had a bona fide reason for not honoring the RTP, such as a legal dispute over the debt.
If you face an RTP assessment, consult a tax professional to evaluate your options.
Tax Tips: Shareholder Loans and RTP Risks
Shareholder loans recorded in a corporation’s financial statements are particularly vulnerable to RTPs. CRA considers undocumented loans as payable on demand. If the CRA issues an RTP, it effectively demands repayment of the loan on behalf of the tax debtor.
Key Case: 3087-8847 Quebec Inc. v. The Queen (2007)
In this case, CRA successfully garnished a shareholder loan, even though the tax debtor had not requested repayment. The court ruled that undocumented loans are effectively demand loans, meaning CRA can enforce payment through RTPs.
Pro Tip
Shareholders of tax-debtor corporations should document loans to avoid potential RTPs.
Conclusion
CRA garnishments, or RTPs, are powerful tools for recovering unpaid taxes from third parties associated with a tax debtor. Failure to comply with an RTP can lead to significant financial consequences, including reassessments and potential legal battles. Additionally, shareholders of debtor corporations should be cautious of undocumented loans, as they can be targeted by CRA through RTPs.
If you have received an RTP or face challenges related to tax collections, consult a qualified tax professional to protect your rights and navigate the complexities of CRA’s collection efforts.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
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