Small businesses make up about 98 per cent of employer businesses in Canada and employ over 7.7 million employees, or almost 70 per cent of the total private labour force. These small business owners, entrepreneurs, and contractors are not taxed automatically at the source of their income and come tax season could end up owing a significant amount to the Canada Revenue Agency if they didn't plan accordingly throughout the year.
As a result, tax debt has increasingly become a common cause of insolvency among incorporated small businesses and sole proprietorships, namely due to insufficient record keeping, not seeking the advice of an accountant, or they simply don't have sufficient funds to make the tax payment so they don't bother filing. However, if left unaddressed, the CRA could start garnishing payments for accounts receivable, or worse, seize their bank account. This could severely cripple a small business or sole proprietorship – or completely prevent it from operating at all.
If you have found yourself in this situation, here are four things to keep in mind as we approach tax season:
File government reporting on time, even if you know you will owe money. Many small businesses don't want to file taxes because they have not held back sufficient cash to make the tax payment or have not made installments throughout the year, but interest and penalties for late filing can add up fast and the CRA will recognize your effort to remain compliant.
Call CRA directly to discuss payment options. Depending on your situation, CRA may be open to various payment plans to repay the arrears owing. However, be careful with what you agree to pay the CRA and ensure that you can meet the payment requirement until such time as the arrears are paid up the date. While paying off your arrears, you should be making ongoing payments to CRA for the current periods to ensure that you do not fall behind again (usually quarterly installments for sole proprietors).
Work with a bookkeeper year-round and an accountant at year end – put together the right team to set you up for success. Getting taxes straightened out is not usually a top priority as individuals are focused on increasing revenue and bringing in new business. The cost of hiring a professional may seem high to start, but the tax debt could be higher, and many individuals with sole proprietorships become insolvent as a result of being reassessed by CRA. Many reassessments are the result of the inability to provide the appropriate supporting information due to poor record keeping. A bookkeeper will aid in ensuring that your records and relating supporting documentation are maintained and that you are putting enough money away throughout the year to help avoid sticker shock come tax season.
Consider consulting a licensed trustee. Licensed trustees are regulated by the Federal government and in many circumstances are the only option for facilitating the compromise or reduction of debt with the CRA, and can provide solutions that prevent business owners from the loss of personal assets or those assets used in operating their business. Credit Counseling services or money coaches can help prepare a budget to aid in making repayments, but cannot negotiate with the CRA for settlement of debt.
A trustee will be able to assess your current financial situation and advise you as to whether a consumer proposal is a possible solution for addressing your current financial situation. If your total debt is over $250,000, you can no longer file a consumer proposal but instead may be able to file a Division I proposal with the option of a bankruptcy as a last resort.
Bridget van Wyk is a senior manager within the recovery and reorganization team of Grant Thornton LLP. She is a chartered accountant, chartered insolvency and restructuring professional and trustee in Bankruptcy. She has experience in assisting debtors and creditors in various areas of insolvency including both formal and informal appointments.