One very unfortunate consequence of outstanding tax debt is a frozen bank account by the CRA. It can create big problems and a lot of stress on both your finances and your life. With a frozen bank account, you cannot withdraw or transfer money. You are also not able to pay for daily essentials such as groceries or gas, rent or insurance.
A. What is the CRA?
The CRA, or Canada Revenue Agency, administers tax laws for the Government of Canada and for most provinces and territories and administers various social and economic benefit and incentive programs delivered through the tax system.
B. Brief overview of why the CRA may freeze bank accounts
The CRA can freeze your bank accounts if you have an outstanding tax debt without contacting it concerning payment arrangements. It does not require a court order to be able to do so. Generally, the CRA is fairly reasonable regarding payment arrangements for your tax debts. In most cases, communication and cooperation are all they ask for, and they will only resort to freezing your bank accounts if you fail to communicate or do not arrange payment. The CRA generally sees this as a last resort.
C. Purpose of the article
In this article, we will have a look at when the CRA can freeze your bank account, how to avoid this from happening and also what to do to solve the problem.
II. When Can the CRA Freeze Your Bank Account?
A. Situations in which the CRA may freeze a bank account
The CRA can freeze your bank account when you have a tax debt and have missed making payments without communicating with a CRA account manager. The CRA is a very powerful creditor as it can legally freeze your bank account without having to notify you or obtain permission from the court.
B. Explanation of the legal process that must be followed before the CRA can freeze a bank account
Before starting legal action, the CRA must do the following:
- make 3 attempts to give verbal legal warning by phone
- send 1 written legal warning letter
Such a legal warning is valid for 180 days. At any time during this period, the CRA can start legal action, even if the balance on the account changes.
After the first 180-day period has expired without any legal action taken, the CRA has only to give one legal warning, whether verbal or written, to renew the warning.
A legal warning period also does not expire, even with ongoing legal action.
The process itself starts with the CRA issuing a so-called Requirement to Pay to both you and your bank. This note informs you and your bank that you owe money to the CRA. This notice also orders the bank to freeze your account and direct any money directly to the CRA to cover your tax debt. The bank is legally obligated to comply and forward both funds in your account and any future deposits to the CRA until either your debt is paid or it receives a legal notification from the CRA to unfreeze your account.
The reason the CRA does not issue notifications to you that it will freeze your account is to avoid debtors trying to move their funds out of their accounts to avoid seizure.
C. How to find out if your bank account has been frozen
Usually, the first sign that your bank account has been frozen is when you try to pay at a store with your debit card, which is declined. A call to your bank will then confirm that the CRA has frozen your account.
III. How to Avoid Having Your Bank Account Frozen
A. Tips for staying on top of your tax obligations
One of the most important things is to make sure to be on top of your finances. Have all documents ready and file your taxes on time. Then the most important step to avoid the CRA freezing your bank account is to ensure to pay your tax debt as soon as possible.
If you can’t pay your tax debt in full, contact a CRA account manager to arrange a payment plan. In most cases, this is all the CRA asks for, to communicate with them and show that you are willing to take care of your debt and take steps toward doing so.
B. Importance of communication with the CRA
The CRA will only freeze your bank account as a last resort. They are generally very reasonable when it comes to payment arrangements, so communication is key when it comes to the Agency. In general, the CRA only asks for communication and cooperation and will only look at freezing your bank account if you refuse to communicate or set up payment arrangements.
C. Understanding payment arrangements and installment plans
The CRA has an expectation that you will pay your tax debt immediately, so arranging a payment plan will require you to negotiate carefully. In many cases, the CRA will offer you a short-term payment plan. This will require you to disclose information to them, such as your income, your employer, assets, and more, so you have to ensure that you have a good strategy in place to propose, otherwise, they might not negotiate a plan with you. You also have to ensure that you can and will stick to any plan you set up with them, otherwise, they might rescind the plan and may take further action, such as freezing your account.
D. Seeking professional advice
If you see that you are having problems staying on top of your finances and that debt is building up, it is best that you speak with a financial professional for advice. They have the experience and expertise to review your finances and develop different solutions to help you get on the path to financial recovery.
IV. What to Do If Your Bank Account is Frozen by the CRA?
A. Steps to take if your bank account has been frozen by the CRA
If the CRA has frozen your bank account, it is recommended to review your finances to determine if you can afford to pay off your tax debt in full. If this is not possible, then try to come up with a plan of which kind of payments you can afford. Then you can contact the agency to negotiate a payment plan. Alternatively, you can also consider filing a consumer proposal or bankruptcy if your financial situation does not allow you to make payments.
B. How to challenge a bank account freeze
There are no ways to challenge a bank account freeze by the CRA as they are legally entitled to do so to recover outstanding tax debt. The only way to release a frozen bank account is to take steps to solve the situation.
C. Explanation of how the CRA may release a frozen bank account
There are several ways to get the CRA to release a frozen bank account.
Pay your tax debt in full
If you are able to pay your tax debt in full, it will immediately stop all collection measures taken by the CRA. If you don’t have the money yourself, you can ask to borrow from a family member or trusted friend, as long as you are sure you can repay them in a timely manner.
Make payment arrangements with the CRA
If you can’t pay your tax debt immediately, you can reach out to the CRA to set up a payment schedule. You must have a solid strategy to show them for the agency to be willing to negotiate a plan. In most cases, this will lead to the CRA releasing your frozen bank account. Please note, however, that failing to stick to the agreed-upon schedule can lead to the CRA rescinding the plan and reinstating your debt with all legal consequences.
Open a new bank account
While this does not release your frozen bank account, opening a new bank account with a different financial institution can at least bring short-term relief to direct pay cheques into this new account so you can still make sure rent or mortgage payments go through and that you can pay for daily necessities such as groceries or gas.
File a consumer proposal or bankruptcy
When speaking to a financial professional, such as a Licensed Insolvency Trustee (LIT), they can lay out ways to handle your debt. The two most common options are a consumer proposal and bankruptcy.
A consumer proposal is a legally binding agreement negotiated between you and your creditors through a Licensed Insolvency Trustee. It will outline how to pay back a previously negotiated part of your debt in monthly payments over the course of up to five years. Basically, you and your trustee will discuss your financial situation to determine how much of your total debt you can reasonably afford to pay back. The trustee then will prepare a proposal to submit to your creditors, outlining the payment plan, for them to approve. After the approval has been made, you have to follow the payment plan and any other stipulations strictly. Once you have made all agreed-upon payments, your creditors will discharge the remaining debt, and you will be debt free.
Bankruptcy goes one step further and comes into play when you have accumulated so much debt that you can’t repay even a portion of what you owe. Here you sign over all non-exempt assets to your LIT, who will use them to cover part of your unsecured debt, which includes tax debt. Bankruptcy comes with pretty strict regulations and impacts your credit rating even more than a consumer proposal, but it also offers you a fresh financial start.
The Canada Revenue Agency can freeze your bank account if you have outstanding tax debt and have not communicated with a CRA account manager to negotiate a payment arrangement. They are legally entitled to seize bank accounts without prior notice and do not require a court order to do so.
So it is very important to take action before it comes to this by either paying your tax debt in full, making payment arrangements, filing a consumer proposal, or bankruptcy.
It is critical for you to seek professional advice when you notice that you are having increased problems paying your taxes and have fallen behind on payments. A professional can analyse your financial situation and advise you about all available options for debt recovery. They have the experience and expertise to find a solution that works best for you.
Risman Zysman has over 45 years of experience providing quality debt solutions. Our team of professionals understands the fears and frustrations of individuals facing financial difficulty. At Risman Zysman, we make sure to present each client with a full range of options and guide them to make the right choices so they can move forward.
To find out how we can help you, call us at 416-222-4600 and get a free, confidential, no-obligation consultation today! Risman Zysman can help you on your way on the road to financial recovery.