In Canada, we have access to numerous public resources due to our taxation system. The Canada Revenue Agency (CRA) oversees taxation. If a taxpayer, which can be an individual or a business, fails to pay their debt, the CRA is responsible for collecting it. A tax lien in Canada may arise if you fail to pay your tax bill. In this guide, you can learn more about tax liens and what to do if you find a lien attached to your property.
What is a tax lien?
A tax lien is a legal claim. It is against the assets of an individual or business. For a tax lien to arise, the entity has failed to pay taxes to the Canada Revenue Agency (CRA). Generally speaking, a lien guarantees payment of debt. In this case, the debt in question is taxes. The CRA typically uses a tax lien as a last resort, after other methods like payment arrangements or wage garnishments have already been attempted.
A tax lien will remain in place until full repayment or the seized property sells. If the debt or taxes are not paid, the creditor can seize the assets connected to the lien. This would serve as debt repayment.
Some people invest in tax liens as a way of making money. Buying tax liens in Canada is possible too, but it is a complex form of investing.
Consolidated Credit Canada is here to guide and help you with your debt repayment.
What is the difference between a tax lien and a tax deed?
A tax deed grants ownership of assets or property to a government body. It is a legal document. A tax deed can come into effect when an individual or business fails to pay taxes. This could be property tax, income taxes or any other debt owed to the CRA. The government can sell the tax deed at auction, transferring full ownership to the winning bidder.
A tax lien is a claim against property to ensure repayment of tax debt. It does not mean property seizing will occur to cover what you owe, nor does it transfer ownership of property. The property holder retains ownership unless they fail to pay off the lien. On the other hand, a tax deed gives the entity the right to seize property and use it to cover your debts. In other words, tax liens are merely a claim to assets, whereas tax deeds give the right to assets.
How do I know if I have a tax lien against me?
The CRA normally communicates with people in written format. The first step the CRA must take to issue a tax lien is to legally certify your debt, usually by registering a certificate of arrears in Federal Court, or via a provincial judgment. The governing body will send you a letter notifying you that your debt has been certified, warning of further legal action if your debt is not repaid. After the certification, the CRA can register a lien against your property, which secures the government’s interest and ensures they are paid first on the sale of the property. When the CRA obtains a tax lien certificate, another letter notifies you officially.
If the CRA does not have your address or has the incorrect one, it’s possible you may not know of a tax lien. In this case, you might become aware if you try to sell your home or refinance your mortgage. If you owe significant tax debt and suspect a tax lien, you can perform a title search at the Land Registry Office. If you’re up to date on your taxes, chances are very low that a tax lien exists against you. The CRA may also place liens on other assets like vehicles or business equipment, not just real estate. CRA liens can also appear on your credit report.
How does a lien affect me?
Since most tax liens exist on homes, there is a chance you could lose your property. However, the CRA’s intention is not to make people homeless. There are many steps before seizing and selling a property to cover tax debt. Seizure and sale of properties are a last resort, usually after other collection efforts fail.
If there is a lien on your property, you cannot sell or refinance without paying off the lien, as CRA has priority over the proceeds of the sale. To avoid escalations or losing your home, it’s best to communicate with the CRA and determine a way to settle your tax debt. If the CRA puts a tax lien on property other than your home, you’re at risk of losing those assets too. The best course of action is to communicate and arrange payment with the CRA.
How does a tax lien affect your credit score?
In general, the CRA keeps your information private and does not report to the credit bureaus, Equifax or TransUnion. However, anything that becomes a matter of public record will appear on your credit report. In the circumstance of a tax lien, the CRA must obtain a certificate of arrears from a federal or provincial court. This appears on public notice, where it can be picked up by credit bureaus, and could appear on your credit report under the legal section.
Even though a tax lien may not impact your credit score directly, it will impact your finances. A tax lien could negatively affect your score once it appears as a matter of public record on your credit report. Even if it doesn’t directly affect your score, it can affect your ability to get other forms of credit, like loans, mortgages, or credit cards. This is because lenders check public records. If they see the tax lien, they may consider it a sign of financial risk.
Tax debt is unique compared to other debts. This is because the CRA has higher authority compared to regular creditors. For this reason, settlement of tax debt must occur in one way or another. If you don’t, your interest rates may rise, or you may struggle to pay other bills and debts.
How long do tax liens in Canada stay on credit reports?
If there is a legal judgment arising from your tax debt, it will appear on your credit report under the legal section once it becomes a matter of public record. Information under this section remains on your credit report for 6 years from the date of filing, depending on your province and the credit bureau.
How to remove a tax lien from a credit report in Canada?
Unfortunately, you cannot remove a tax lien from your credit report. However, if it’s been over 6 years and it’s still on your report, you can file a dispute with the credit bureau to remove it.
Can a creditor put a lien on my property?
Yes, a creditor can put a lien on your real estate if you do not repay your debt. Of course, you must be a property owner. However, before they can obtain a lien, the creditor must get a court judgment against you. This means they must go to court and sue you. The judge must rule that you owe money, which means the creditor has won in court and has the right to collect it from you. At this point, the creditor can put a lien on your home or other assets. You will be notified if the lien is registered.
Can the CRA put a lien on my home?
Yes, the CRA can put a lien on your home if you have significant delinquent tax debt. The lien is a legal claim against your property. They can also put a lien on other assets of substantial value, like cottages, vehicles, or business equipment. They typically attempt other collection methods first, like letters, calls, and payment demands.
The CRA does not need a traditional full-court judgment to place a lien like other creditors. They must first certify your debt via a federal court or provincial judgment. This is a legal confirmation of how much you owe and becomes a matter of public record. They need this certification before they can put a lien on your home. If you are at risk of a lien, consider seeking professional advice.
How to avoid getting a CRA tax lien
- File your tax returns on time. Even if you can’t pay the full amount, filing prevents extra penalties from adding up. It also shows you’re acting in good faith.
- Respond promptly to CRA notices and letters. Ignoring these notices may lead to escalation or legal action.
- If you know you’re going to have trouble paying your taxes, communicate with the CRA early and proactively. Setting up a payment plan can prevent enforcement action like tax liens.
- Organize your financial records so you have all your information handy. This can be helpful to resolve issues or disputes about what you owe.
- If you’re struggling, seek professional help. A consumer proposal can halt CRA collection actions before a lien is registered. However, this is usually one of the last options. A credit counselling agency can help you decide. Consult a Licensed Insolvency Trustee or a tax lawyer if you’re struggling with a significant amount of tax debt.
- Stay on top of your paperwork and dues. Don’t wait until enforcement starts. Once a lien is registered, it limits your options on how to resolve the debt.
How to stop a tax lien in Canada?
To avoid a tax lien in Canada, file your personal and corporate taxes every year. If you owe taxes, be sure to pay them. If you don’t have tax debt, a tax lien cannot arise.
If a tax lien is already made against you, you have a few options to stop it:
- Pay the taxes. If you can afford to pay the balance, do so now.
- Call the CRA and discuss your situation transparently.
- Negotiate a payment plan with the CRA. Once your tax payments are complete, the tax lien will lift.
- Sell your home and use the proceeds to repay your tax debt. Keep in mind that you must pay your mortgage first, if applicable. If your home sale proceeds don’t cover the entire tax debt, you are still responsible for the difference.
- File for a consumer proposal or bankruptcy. This is a last resort option. It will not remove the lien immediately. However, during the process, some sort of arrangement will arise to handle your tax debt. In the case of a consumer proposal, the CRA must agree to your terms of the debt. The lien usually remains till your debt is settled through this arrangement.
Tax debt is considered very serious. Unlike ordinary creditors, the CRA has a lot of authority. For this reason, you should handle tax arrears as soon as they come to your attention.
We can help you avoid a tax lien in Canada
Navigating tax debt can be overwhelming. If you’re not sure what to do or need help in the process, Consolidated Credit can help. Reach out today for a consultation!
