Here’s What You Can Do If You Receive CRA’s Garnishment Notice

The Canada Revenue Agency (CRA) collects all types of taxes, excise tax, GST/HST, income tax, and withholding tax from the person who earns the income. This person is the tax debtor as he/she owes the tax to the CRA. However, if the tax debtor doesn’t pay tax, the CRA imposes fines and penalties and sends a court order. When that also doesn’t work, it reaches out to the third party who paid that income to the tax debtor and collects tax from them. This third-party route is where the garnishment notice comes in.

This article will explain how taxes work and where garnishment applies. And if you receive a garnishment notice, how should you respond to it?

How Do Taxes Work?

A person earns income in various forms, such as jobs (wages, salaries, bonuses, or commissions), rent, insurance claims, reimbursement of expenses the third party owes to the debtor, amounts held by financial institutions, and loans. All forms of income are subject to some form of tax, such as GST, income tax, withholding tax, and more.

For instance, Annie is a tenant of Mary, a non-resident landlord. The CRA requires Annie to withhold tax on the rent and pay the remaining to Mary. Annie should pay the tax withheld from Mary to the CRA. Mary is the tax debtor, but if she doesn’t pay taxes, the CRA can send a garnishment notice to Annie and ask her to pay the tax.

If Annie receives the garnishment notice, her obligation to pay tax shifts to her. If she owes money to Mary, Annie is liable to pay the tax to the CRA. 

What is a Garnishment Notice?

When the CRA cannot collect tax or reach a payment agreement with the tax debtor, it contacts the source of income (Third party) and demands tax payment through a Garnishment notice.

The garnishment notice is a legal document issued in three ways:

• Requirement to pay (RTP)
• Enhanced requirement to pay (ERTP)
• Demand on a third party (DTP)

The CRA will also mail a copy of the garnishment notice to the debtor. When you receive this notice as a third party in the transaction, you are liable to pay the tax to the CRA. The amount you owe to the tax debtor will be reduced by the tax amount you pay the CRA.

In our above example, Annie withholds 25% tax on $2,000 rent. If she pays the $500 withholding tax to the CRA, she owes Mary $1,500. 

How To Respond to a Garnishment Notice?

The garnishment notice is valid for 90 days, 1 year, or until the debt is paid. One should respond to any notice from the CRA, as failure to do so could risk an assessment. You don’t want to face an assessment, as that gives the CRA the right to seize money from your bank account or anyone who owes money to you.

Every tax debt collection has a time limit of six to 10 years. However, the CRA can restart or extend the collection limitation period in certain situations. It means you could get a garnishment letter even for a 10-year-old tax debt. It is advised to avoid waiting for the collection limitation period to get over as the tax owed can accrue interest until it is paid in full.

As a third party, your tax obligation ends when:

• You no longer owe amounts to the tax debtor
• You pay the maximum amount mentioned on the garnishment notice
• You receive a letter from the CRA indicating the garnishment is no longer in effect
• The RTP or ERTP expires

How To Pay Tax Under Garnishment Notice?

On the first page of the garnishment notice, the CRA will mention the maximum amount you must withhold from the tax debtor. The notice will specify:

• Fixed amount/percentage for each payment or the fixed amount for all payments in a month
• Payment instructions, whether you have to send the tax amount for every payment, every month or on termination of the agreement.
• Provide details on who and where to send your payment.

When making the payment via cheque or money order, mention the account number from the remittance form and mail both the form and the cheque/money order to the address mentioned in the garnishment. Issue the cheque or money order payable to the Receiver General for Canada and record the transaction for future reference. 

If the CRA withdraws the garnishment after you send the payment or you wrongly paid more than the required amount, you can contact the CRA at the number provided on the notice.

Contact Hagar Liao CPA Professional Corporation in Mississauga to Help You with Taxes

Talk to a professional tax advisor who can help you with all CRA notices and tax payments. At Hagar Liao CPA Professional Corporation, our accountants and tax advisors can provide services such as filing taxes and staying compliant with tax laws. To learn more about how Hagar Liao CPA Professional Corporation can provide you with the best accounting and tax planning expertise, contact us online or by telephone at 289-803-1818.