The words “tax” and “lien” are intimidating on their own, but when used together they represent a serious legal and financial matter. If a person does not pay their annual tax owed, the government can take significant steps to recover the debt, including putting a lien on a taxpayer’s property or assets.
This article will provide an overview of tax liens in Canada, including how they work, their legal framework, and how to avoid getting a tax lien put on your assets.
What Is A Tax Lien?
A tax lien is when the Canada Revenue Agency places a legal claim (meaning the debt owing was verified and approved by a court) on a taxpayer’s property or assets if they do not meet their tax obligations. A lien helps ensure that the debt is legally recognized and will eventually be paid. That’s because if you don’t pay off what you owe, the CRA will seize your assets and sell them to pay off the amount owing.
Note, however, that imposing a tax lien is considered a very serious step and is generally used as a last resort. For example, the government may first try garnishing your wages to secure payment of a tax debt.
Assets the government can seize include property like a house or cottage, vehicles like a car or boat, valuable artwork and business equipment. Once your debt is paid, the tax lien will be removed.
Types Of Tax Debt That Can Lead To A Tax Lien
The CRA has the authority to impose a tax lien on your assets for a variety of unpaid tax debts. Here are some types of taxes you can owe the government that can lead to a tax lien:
- Income tax: Unpaid personal or business tax debts are some of the most common reasons for the CRA to initiate a tax lien.
- Property tax: Your municipal government may impose a tax lien if you don’t pay your property taxes. Often this step is initiated once you’ve not paid your taxes for two years or more. If you don’t pay off the amount owed, your home could eventually be sold to clear the debt.
Learn more: What Happens If You Don’t Pay Your Taxes in Canada?
How Will I Know If The Government Placed A Tax Lien On My Assets?
It’s very unlikely that a taxpayer will be unaware that the government has placed a lien on their assets because there are specific steps the CRA will take before taking such a drastic step.
Firstly, the government will give you a chance to set up a payment schedule. If you don’t set up an agreed-upon schedule or fail to make scheduled payments, the CRA will then try up to three times to reach you by phone to give you a verbal warning.
They will also send you a legal warning letter outlining how much you owe and the potential steps they could take for non-payment.
If a taxpayer continues not to pay their debt, the CRA will then go to court to legally certify the debt amount. Once your debt is certified (and becomes a matter of public record) you’ll get a letter confirming that your tax owing has been officially recognized by the courts and the government can now take action to secure the debt via a tax lien.
If you are unsure whether or not you have a tax lien against your property, the best thing to do is contact the CRA directly. Also, be sure to always keep your address and personal details up to date on your CRA account to ensure the government can reach you if needed.
| What is a writ? A writ, issued by the Federal Court, is a written formal order that authorizes the government to take action against the debtor. It provides permission to authorities to seize and then potentially sell the assets or property of a taxpayer or business that has not paid their taxes. |
What Happens If The Government Places A Tax Lien On Your Asset?
If you continue not to pay your debt upon being notified that your arrears have been certified in court, a lien will be registered against your assets or property to secure payment. At this point, the government can seize and sell the property and use the funds to pay off your debt before giving you the remainder of the proceeds of the sale.
Other Actions the Government May Take
Issuing a tax lien is not the only option available to the CRA when they want to recoup tax arrears. Other steps they may take to secure payment of taxes owing include:
- Wage garnishment: The CRA has the power to force your employer to deduct a set amount from each of your paycheques and send it directly to the government (wage garnishment) until the debt is paid.
- Transfer tax debt to someone else: If you continue not to pay your debt off, the government can transfer your debt to a third party, such as your spouse, an employer or a financial institution. The government may do so if you attempt to evade payment by transferring assets to another person or corporation or if your employer does not garnish your wages, for example.
Can You Avoid A Tax Lien By Transferring Your Property To Someone Else?
While it may seem like a smart move to transfer property to a spouse or child to get it out of your name and thus avoid a tax lien, it’s not a viable solution. The CRA is aware that taxpayers may try to avoid getting their property seized by transferring it to another person, such as a family member and has thus taken steps to prevent this loophole.
If you have a tax debt and transfer a property to someone who is not at “arms length” (someone related to you by blood or marriage, for example) while your debt is active, the CRA will simply transfer the debt to the recipient of the property.
How To Avoid Getting A Tax Lien?
Here are some options you have to avoid a tax lien with the CRA.
CRA Payment Arrangement
It;’s important to keep in mind that the government wants to avoid tax liens as much as you do —they would rather simply collect what they are owed. For this reason, the CRA is willing to work with taxpayers to set up manageable payment plans where you can pay back your tax debt over time on an agreed schedule. You would simply need to call them to begin the process.
Speak To A Credit Counsellor To Help With Debt Management
Another option is to speak to a credit or tax professional. They may be able to help you negotiate payments with the government. A professional may even, in severe cases, suggest declaring bankruptcy or help devise a consumer proposal (that the CRA must agree to) that will help you pay back your debts.
Sell The House And Repay The Debt
It’s a drastic step, but as a last resort, you may simply have to sell your property to be able to pay off your debt. You would receive any remaining funds once the CRA has taken what’s owed them.
Learn more: Selling Your Home to Become Debt Free
How Does A Tax Lien Affect Credit?
Having a tax lien issued against you can have serious impacts on your financial health. Even though, due to privacy concerns, the CRA will not directly report your tax debts to Canada’s two credit bureaus (Equifax and TransUnion). However, once the government gets your debt certified by the court, it will then become part of the public record. Once on the public record, it will be noted in your credit report. At that point, it will likely become much harder to borrow money because you’ll be viewed as a high risk borrower.
Learn more: Can CRA Tax Debt Affect My Credit Scores?
How To Remove Tax Lien From Credit Report?
Unfortunately, it’s impossible to get a tax lien removed from a credit report. It will only automatically be removed after six years.
Bottom Line
The CRA takes recovering tax debt seriously and tax liens are a powerful tool they use when a creditor continues to avoid paying their taxes. Luckily there are ways to avoid having your assets and property seized, such as scheduling tax payments or getting help from a tax or credit professional.
