When a shareholder owes personal tax debt in Canada, the CRA can issue a Requirement to Pay (RTP) directly to their Canadian-controlled private corporation (CCPC). This legal order forces the company to redirect any declared dividends or salary straight to the government until the personal tax arrears are paid in full.
Owning and operating a Canadian-controlled private corporation (CCPC) provides significant flexibility in how you pay yourself. Whether you run a successful consulting firm in Toronto, a construction company in Calgary, or a retail shop in Vancouver, business owners typically compensate themselves through a mix of salary and dividends. However, if you fall behind on your personal taxes, this flexibility can quickly turn into a massive legal headache when the Canada Revenue Agency (CRA) takes aggressive collection actions.
If you ignore your personal tax arrears, the CRA will not simply go away. 📌 Under the federal Income Tax Act, the CRA possesses sweeping powers to collect debts without needing a traditional court order. One of their most powerful tools is the Requirement to Pay (RTP). When the CRA issues an RTP to your corporation, they are legally intercepting the money your company owes you. Failing to handle this situation correctly can paralyze your personal cash flow and create massive liability for your business.
Step-by-Step Process in Canada
Dealing with a corporate Requirement to Pay requires immediate and careful action. You cannot simply ignore the CRA, nor can you use accounting tricks to hide the money. Here is how you must handle the situation to protect both your business and yourself.
Step 1: Assessing the Requirement to Pay (RTP)
When your corporation receives the RTP letter from the CRA, it will explicitly state the amount of personal tax debt you owe. 🔍 The document is a legally binding order directed at the corporation, not you personally. It commands the business to remit any funds payable to the tax debtor (you) directly to the Receiver General for Canada. You must immediately provide a copy of this notice to your corporate accountant and your Canadian tax lawyer.
Step 2: Freezing Payouts to the Shareholder
From the moment the RTP is received, your corporation must comply. If the company declares a dividend or processes your payroll, those funds cannot be deposited into your personal bank account. If the corporation ignores the RTP and pays you anyway, the CRA can hold the corporation legally liable for the amount it failed to remit. This means your personal tax debt effectively becomes a corporate liability, which can destroy your company’s operating cash flow.
Step 3: Contacting the CRA Collections Officer
To restore your personal income, you must negotiate directly with the CRA collections officer assigned to your file. 📞 Your tax lawyer will typically contact the officer to discuss a voluntary payment arrangement. The goal is to prove that the 100% garnishment of your dividends or salary creates undue financial hardship, preventing you from paying for basic living expenses like your mortgage, groceries, and utilities.
Step 4: Establishing a Payment Arrangement
If the CRA agrees to a payment plan, they will lift or modify the RTP. 📝 You will typically need to provide complete financial disclosure, detailing your household income and expenses. Once a monthly payment amount is agreed upon (for example, $1,500 CAD per month towards your tax arrears), the CRA will send a letter releasing the corporation from the RTP. Only then can your company safely resume paying your dividends or salary.
How Much Does it Cost in Canada?
Resolving a CRA collections dispute involves both the underlying tax debt and professional representation fees. 💲
- Tax Debt and Interest: You must pay the original tax arrears plus compound daily interest, which is calculated at the CRA’s prescribed interest rate.
- Tax Lawyer Fees: Retaining a tax lawyer to negotiate a payment arrangement and remove the RTP generally costs between $2,000 and $5,000 CAD.
- Corporate Penalties: If your corporation ignores the RTP, the CRA can assess penalties against the business equal to 100% of the amount it should have remitted.
How Long Does the Process Take?
Time is of the essence when an RTP is issued. A Requirement to Pay takes effect immediately upon receipt by the corporation. Gathering your financial documents and having your lawyer propose a payment plan usually takes 1 to 2 weeks. Once the proposal is submitted, a CRA collections officer may take another 1 to 3 weeks to review and approve the arrangement before officially lifting the garnishment.
Comparison: How Different Payouts are Affected by an RTP
The CRA treats different types of corporate compensation differently under an RTP. 📈
| Type of Corporate Payout | Is it Subject to the RTP? | Details of CRA Seizure |
|---|---|---|
| Declared Dividends | Yes (100%) | The entire amount of the declared dividend must be sent to the CRA until the debt is cleared. |
| Employment Salary | Yes (Portion) | Usually, federal laws allow for a portion of wages to be exempt to cover basic living expenses, but the CRA can take up to 50% or more. |
| Shareholder Loans | Yes | Any advance of corporate funds to the shareholder can be intercepted and demanded by the CRA. |
| Expense Reimbursements | Sometimes | Legitimate reimbursements for company expenses are generally safe, but heavily scrutinized during an RTP. |
Frequently Asked Questions (FAQ)
Can the CRA seize the corporation’s operating bank account?
No, not directly for your personal debt. The CRA cannot seize the company’s money just because you own the company. They can only seize the money the corporation specifically owes to you, such as a declared dividend, salary, or a repayment of a shareholder loan.
Can I just stop declaring dividends to avoid the RTP?
Technically, if the corporation does not declare dividends and does not pay you a salary, there is no transaction for the CRA to intercept. However, this means you will have zero personal income to live on, which is usually not a sustainable strategy.
Can I pay my spouse dividends instead?
Attempting to redirect your compensation to a spouse or family member after an RTP is issued is incredibly dangerous. The CRA can invoke Section 160 of the Income Tax Act, which makes the recipient (your spouse) personally liable for your tax debt up to the value of the funds transferred.
What happens if my corporation goes bankrupt?
If your corporation is insolvent and files for bankruptcy, the RTP becomes moot because the company has no funds to pay you. However, your personal tax debt will still survive, and the CRA will look for other personal assets or bank accounts to garnish.
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