Published: March 4, 2020
Last Updated: October 21, 2022
CRA Garnishments: Requirements to Pay Tax—A Canadian Tax Lawyer Analysis
Requirements to Pay Tax: Garnishment For Unpaid Tax Assessments
When a tax debtor cannot afford to pay their Canadian tax assessment within a reasonable timeframe, CRA will not hesitate to collect the debt from someone else. CRA has a variety of tools at its disposal that allow it to collect tax debts from third parties. This article focuses on garnishments, called “requirements to pay” or RTPs, which CRA issues to third-parties associated with a tax debtor. RTPs allow CRA to demand that any third party that owes funds to, or is holding funds for, a tax debtor to instead pay the funds directly to CRA to the extent of the tax debt. Essentially, a tax requirement to pay allows CRA to put itself in the shoes of the tax debtor with respect to debts owing to the tax debtor by third parties, without the need for a court order. If you have been garnished by CRA, our Toronto tax lawyers can negotiate a payment arrangement with CRA on your behalf to halt CRA collection activities.
Legal Effect of Requirements to Pay
Subsection 224(1) of the Income Tax Act allows CRA to issue RTPs to any person whom CRA suspects is liable, or will become liable within one year, to make a payment to a tax debtor. Requirements to pay are quintessential CRA collection action. However this means that RTPs cannot be issued for debts relating to income tax until the tax debtor has exhausted their objection and appeal rights under the Canadian Tax Act. Note that there are no such collection restrictions for debts relating to GST/HST or payroll source deductions and technically CRA can issue tax requirements to pay once a Notice of Assessment or Reassessment is issued to a taxpayer for GST/HST or source deductions owing. Although RTPs can seriously affect a tax debtor’s life, the process related to them is not particularly onerous for CRA, unlike other creditors: requirements to pay can be issued without CRA having to take any court action.
When a tax debtor fails to pay amounts owing to CRA in timely fashion, the first collection action CRA typically takes is to issue an RTP to the tax debtor’s bank(s) to clear out any accounts with funds in them. For example, if a taxpayer has a $28,000 tax debt and a CIBC savings account containing $30,000, if CRA issues a requirement to pay to CIBC for the tax debt, CIBC will cut a cheque to CRA for $28,000 and there is nothing the account holder can do about it. If on the other hand the CIBC account contains insufficient funds to honour the full amount of the RTP, the bank will freeze the account until the tax requirement to pay is lifted. It is generally accepted that CRA cannot issue requirements to pay on bank accounts that are owned jointly by the tax debtor and another person, often a spouse, who does not have a tax debt, although CRA may still attempt to do so. Other common recipients of RTPs include the employer of a tax debtor or clients of a vendor tax debtor who owe the tax debtor for supplies. CRA will also issue requirements to pay to the financial institution that holds the tax debtor’s RRSP account, although amounts are only payable to CRA by the financial institution on withdrawal by the tax debtor, since amounts in an RRSP are typically only payable to the holder on demand.
Tax Assessment for Failure to Honour RTP
If the recipient of an RTP fails to honour it, either by paying funds to the tax debtor in lieu of CRA or potentially by choosing to not pay anything to CRA that is otherwise owing to the tax debtor, the Income Tax Act contains provisions that allow CRA the ability to issue a Notice of Assessment to third-parties that fails to honour requirements to pay, in effect transferring a portion or all of a tax debtor’s liability to the recipient of the RTP. As with any tax assessment or reassessment, the recipient of an RTP who is later assessed by CRA for the failure to honour the RTP can file a Notice of Objection to the tax assessment within ninety days of it being issued by CRA. However, the issues on objection will be restricted to whether the third-party was in fact liable to pay the tax debtor within one year of being issued the requirement to pay and whether the third-party failed to pay the amount owing to the tax debtor to CRA. Simply deciding to not pay anything at all is not necessarily a defence to a tax assessment issued for failing to abide by the terms of an RTP, but it may be if the third party debtor has a claim or bona fide reason for not paying to the creditor. If you are assessed for failing to honour a requirement to pay, speak with our Canadian tax law team to determine the best course of action.
Tax Tips – Beware Shareholder Loans Owing to or From a Tax Debtor
Revenue Canada will exhaust all legal avenues at its disposal to collect tax debts. Collecting the arrears of an inactive corporation for GST/HST, payroll source deductions and in particular corporate tax can present a significant challenge to CRA if the corporation does not have any assets. When a shareholder draws cash out of its corporation, a corporation’s accountant will routinely characterize the draws in the corporation’s financial statements as salary, dividends, management fees, returns of capital or loans made to the shareholder, ie. shareholder loans. If CRA is having difficult collecting tax arrears from a corporation, it may review the financial statements of the Corporation to determine if there any outstanding amounts owing to the Corporation, which might lead CRA to discover shareholder loans recorded on the financial statements of the corporation.
Shareholder loans are often not documented and it is CRA’s position that undocumented loans are payable on demand and that issuance of an RTP to a third-party indebted to a tax debtor constitutes such a demand. In 3087-8847 Quebec Inc. v. The Queen, 2007 TCC 302a corporation, of which a tax debtor was a shareholder, was issued a requirement to pay for various amounts payable to the tax debtor shareholder, including a loan payable to the shareholder by the Corporation. The corporation failed to honour the RTP, was subsequently assessed by CRA for its failure to do so and argued on appeal to the Tax Court of Canada that since the shareholder had not requested payment of the shareholder loan, the loan was not payable to the tax debtor shareholder. The Tax Court disagreed and stated “to the extent that the tax debtor is also the creditor in respect of a demand shareholder loan, it is not necessary that the tax debtor formally demand payment of that loan for the debtor in respect thereof to be required to make a payment under subsection 224(1)”. Therefore, in the case of undocumented loans payable to a tax debtor by a third-party, CRA can issue a requirement to pay to the third party and in essence attach part or all of the tax debtor’s arrears to the third-party. Shareholders should therefore avoid simply walking away from a tax debtor corporation to which they owe funds via an undocumented loan, as this could result in them receiving an RTP in the future and a subsequent tax assessment. Speak with one of our leading Toronto tax lawyers to determine how best to handle your affairs with respect to a tax debtor corporation.
Conclusion – CRA Tax Requirements to Pay
Requirements to pay are powerful legal documents that are frequently utilized by CRA in order to collect the arrears of a tax debtor from third-parties who owe, or hold money for, the tax debtor. However, RTPs are generally misunderstood or ignored by third-parties that receive them. A failure to abide by the terms of an RTP can result in CRA issuing a tax assessment to the recipient of an RTP. In addition, the debtor of an undocumented loan owing to a tax debtor can be issued a requirement to pay by CRA and later issued a tax assessment, even if the tax debtor never requests payment of the loan. If you are issued an RTP for a significant sum, book an appointment with our top Toronto tax lawyers to avoid ending up on CRA’s bad side and with a tax debt.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
Frequently Asked Questions
An income tax debt is subject to a 90-day collection restriction for the period after a notice of assessment or reassessment is sent. The CRA can start collection action on the 91st day unless a notice of objection or appeal is filed.
If your wages are garnished in order to pay your debts, the amount that is garnished is considered received by you for federal income tax purposes. That means that the amount garnished is considered income and is reportable as wages on your federal income tax return.
A RTP (requirement to pay) or an ERTP (enhanced requirement to pay) is issued by the CRA to a third party that owes money to a taxpayer from whom CRA has been unable to collect tax debt from.
Although both RTP and ERTP are tools that the CRA can use to collect tax debt from third parties, the difference between the two lies in the CRA’s priority over secured creditors. RTP gives the CRA priority over most other creditors. However, a secured creditor with an interest on assets may have a higher priority over the CRA. Unlike an RTP, an ERTP gives the CRA priority over the interests of secured creditors. ERTPs are used to collect source (payroll) deductions, GST/HST, or Air Travellers Security charges that a taxpayer has failed to pay.