If the Supreme Court of Canada upholds a recent decision of the Federal Court of Appeal, tax authorities may lose the right to collect a tax debt if they let it sit too long. Even if the appeal is overturned, the CCRA still might not collect on the debt in issue. The unintended results of a long-standing CCRA policy are an instructive tale for the public and a sad lesson in irony for one taxpayer. Joe Markevich is a taxpayer whose tax debt was administratively “written off” in 1987. From 1987 to 1997, the CCRA did not act to collect the tax debt. In 1987 Mr. Markevich was insolvent and could not pay his taxes even if he wanted to. In the cryptic world of tax law, written off only means - the authorities are not actively pursuing debt collection at this time. It is doubtful that Mr. Markevich understood the implications of his debt being “written off.”
In 1998 – after a 10-year hiatus - the CCRA started collection action. By this time, Mr. Markevich’s personal situation had rebounded. Unfortunately, with interest, his total debt had grown from $230,000 to well over $750,000. In court, Mr. Markevich argued that provincial limitation laws prevented the CCRA from taking collection action.
The Federal Court of Appeal agreed with Mr. Markevich. Provincial limitation laws apply to tax debts just like any other debt.
Not Over Yet
The Supreme Court of Canada has agreed to hear an appeal of the Federal Court’s decision. Furthermore, the CCRA has indicated that it will ask for an amendment to the Income Tax Act if it loses the appeal.
Amending the ITA will not necessarily prevent the application of provincial limitation periods to federal tax debts. Arguably, once a tax debt is fixed, it comes under the domain of provincial constitutional jurisdiction. Amending the ITA could be a fruitless exercise if the courts see debt collection as a matter under exclusive provincial authority.
Instructive for the Public
Do you fit into the Markevich category? A creditor generally has 6 years to sue on a debt. If the creditor does nothing for 6 years, the debt is extinguished. If, at any time within that 6-year period, a debtor confirms the obligation, the 6-year time period is reset back to zero. Making a debt payment is an acknowledgment.
In counting the 6-year period, the hard part may be trying to determine when the right to sue arose. For example, the Excise Tax Act makes directors jointly and severally liable for a corporation’s GST debts at the time the corporation becomes liable. However, the CCRA can collect from the director only after the CCRA takes certain actions that signify that it tried unsuccessfully to collect from the corporation. Those actions often occur years after the corporation incurred the GST obligation. In some circumstances, it is very difficult to determine when the clock started ticking.
If the CCRA has advised you that a tax debt has been “written off”, you need to consider what that means to your long-term financial health. The CCRA will not write off obligations if taxpayers have the ability to pay their debts. Any business or financial decisions will be tainted by the growing debt, whether the CCRA is actively pursuing collection actions or lurking in the weeds. Remember, the debt is not forgiven. Govern yourself accordingly.
Ironic for Mr. Markevich
The CCRA wants Mr. Markevich to pay his debt. On the one hand, if Mr. Markevich loses at the Supreme Court, he may have to declare bankruptcy. The CCRA will not get its back taxes and Mr. Markevich will have to rebuild his financial life from scratch (again). Who would have thought that writing off a debt would lead to bankruptcy? On the other hand, if the CCRA loses, the government is probably going to change the law and we will have further uncertainty until the new rules are litigated in the courts. Who would have thought that a Supreme Court decision would lead to uncertainty in the law?
Certainly either result would be ironic. I doubt taxpayers would find either result satisfactory.
-- J. Andre Rachert
The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.