How do you end up owing more than $150,000 in Goods and Services Tax and Provincial Sales Tax? For bar operator Debbie, it all began when a heart attack forced a former boyfriend to sell his bar and banquet facility.
The buyer was a businessman whose religion forbade him from owning a liquor licence, so Debbie, whose last name has been withheld, agreed to run the bar until he found someone to take it over.
There was trouble right off the bat, with her former boyfriend demanding payment up front for inventory. "That meant no reserves were banked for the lean winter months," Debbie said.
"I had just enough money to keep some employees, who were mostly single mothers." By the time control was passed to new managers, "about $8,000 to $10,000 in late GST and PST payments" had accumulated under her business number.
Later, she discovered the new managers were diverting tax remittances toward their numbered companies. By the time they fled, GST and PST were both in arrears by more than $100,000 on Debbie's account.
The PST obligation was cancelled after Debbie explained her situation to provincial authorities. She was not so fortunate with the GST; with interest and penalties the liability is now estimated at more than $150,000.
CRA looking at compliance measures
Debbie is but one of the many business people who have not remitted GST on time to the Canada Revenue Agency. Her plight shows how quickly cash- flow problems can escalate and can put business owners in jeopardy with the taxman.
According to a CRA report released in April of 2009, approximately one in four businesses were late for at least one reporting period in 2007.
The most common reason for failure to meet filing obligations was ensuring funds on hand didn't run dry, an analysis from the Canada Revenue Agency said.
(The CRA allows businesses with annual taxable supplies of $1.5-million or less, to file annually. But business can choose to remit GST monthly or quarterly. By choosing more frequent GST reporting periods, businesses can better stay on top of their tax obligations, accountants say. Penalties for overdue GST payments start at six per cent per year.)
To heighten deterrence, the CRA report urged the federal government to prosecute more firms and to increase the publicity of punishments. These and other measures remain under review, with decisions slated for next spring at the earliest.
"The CRA is still in the planning and development stages and a formal evaluation of the outcomes of these initiatives is anticipated beginning in March, 2011," noted CRA spokeswoman Caitlin Workman in an e-mail.
Carrots versus sticks
Failure to remit GST and other taxes is not always intentional, says Corinne Pohlmann, vice-president of national affairs at the Canadian Federation of Independent Businesses. "We're not so big on using sticks instead of carrots."
Debbie's case involved misdirection by business associates. For most other business persons, it's usually a simpler matter - such as confusion over what products are exempt from the GST or a misunderstanding about filing requirements.
For example, "some annual GST filers may remit taxes by the filing deadline of June 15, not realizing the payment deadline is actually April 30," Ms. Pohlmann says. "Many businesses want to do the right thing. Educational approaches are often more appropriate for first-time offenders than penalties or prosecutions."
Dealing with the taxman during a cash crunch
"Firms that sell on a cash basis are less susceptible to falling behind on their GST remittances than firms selling on credit," observes John Wright, a chartered accountant who does cash-flow modelling at McLarty and Co. in Ottawa.
"If a firm is remitting GST on a monthly cycle and doesn't typically get paid until 60 or 90 days after the sale, problems can arise when customers further extend payment - as often happens in an economic downturn," he adds.
"At least file with CRA to avoid paying the penalty," Mr. Wright recommends to firms facing cash crunches. "Then a business just has to pay interest on overdue balances when they begin remitting again.
"If a business ignores CRA, the agency will get tough. But if the business talks to them and at least tries to make arrangements to pay what it can, CRA is usually more understanding.
"The sooner a business realizes it has a cash problem and takes action, the better," Mr. Wright says. "This is probably the most important thing to do."
"Some businesses go into denial and keep cash problems to themselves. By the time they start talking to their accountant or bank, they may have lost many options for solving their problem. It's easier to deal with cash shortages at an early stage.
"The banks don't like it when a business gets behind in its tax remittances. If they have loaned money to the company, they see a late tax filer as a higher lending risk, and may cut back on credit," he adds.
"We had one client come to us in a 'special credit' situation with their bank [separated from their loan officer and transferred to a unit that assesses their viability] I told them if they had come to us three months before, we could have done a lot more for them."
How are they doing now?
"Still hanging in. … We helped them find a second-tier bank willing to give them a line of credit. But they're still struggling. It's hard to catch up once a company gets behind, with the higher cost of financing and so forth."