September 5, 2017

Proposals can be a good way of solving many debt problems including CRA tax issues but they can be far more problematic for the debtor if they are not carefully and thoughtfully conceived.

Many self-employed people have tax problems from unwanted audits to arbitrary assessments.  Self-employed people are far more likely to attract the attention of the CRA than people who are paying taxes at source through their employer or than larger corporations that can afford legal counsel and accountants to defend themselves against the CRA’s complex rules and regulations.

The problem is not, of course, all on the CRA, they are just picking low hanging fruit. The biggest problems small business owners face are related to 1) the complexity of our tax filing system; and 2) that most small businesses are under-funded and unprepared when it comes to such important functions as bookkeeping and tax filing.

Most people we encounter would far rather pay their debts than avoid them. I don’t recall ever meeting a person making an assignment into bankruptcy who said “Yup! Just one of my life’s goals – Get out of high school, go to university, start a career, get married, have children, go bankrupt…”

The fact is that 99% of all people filing for bankruptcy would far rather avoid it – often to their own detriment. Proposals are easy to sell to distressed debtors who have a little bit of surplus income. But in order to be effective they must be well thought out as discussed in a previous blog

Many people will file a proposal as a knee jerk reaction to avoiding bankruptcy and in their minds “doing the right thing” – but such notions are often misguided, because a proposal can be far more damaging to future creditability than a bankruptcy, but perhaps moreover because they can postpone the inevitable (bankruptcy) at a significant cost.

Proposals should be fair to all of the stakeholders (participants) not just to the creditor, the debtor or administrator (fees).

So what is and isn’t fair when proposing to the CRA?

First of all it is important to understand that the CRA is a powerhouse of sophisticated collectors.  Not necessarily thoughtful, considerate or insightful but definitely powerful and sophisticated.  They have many tools available including the ability to look back at your earnings history, access to databases showing the value of assets you own as well as the ability to issue notices to seize assets, incomes and accounts without warning.

At a meeting to discuss their “wants” in a proposal the CRA can be very forceful and persuasive – but not always right!  The more experienced collectors are usually the best ones to deal with, although the choice is theirs not the Debtor’s or the Administrator’s, since they have seen more proposals fail on overzealous targeting. The newer CRA insolvency collectors tend to have come directly from collections and lack that experience.

In any event when contemplating a proposal in which the CRA carries the deciding vote they will typically ask for “enforcement clauses” to be added to the proposal. These are clauses that ensure that future returns and remittances will be made on time.  Such clauses may make sense to ensure the debtor is compliant but can be the cause of longer term problems particularly when it comes to finishing the proposal.

The debtor can be compliant in all things related to the proposal having made all payments on time except the current remittances, then find themselves caught up in a cycle of catching up on arrears then falling behind on current filings – having the effect of making it impossible to conclude the proposal.

Sometimes a bankruptcy just makes more sense – it concludes the tax arrears with more immediacy and leaves the debtor in a better position to move forward meeting current remittance requirements. However, for some small business owners a (false) sense of pride sets them up for repeated failure by not acknowledging that they really do not have the earning capacity to be in business in the first place.