How the CRA can seize your client's portfolio

The CRA is empowered to seize your client’s portfolios if they find themselves owing too much to the tax man.

That’s the warning from Toronto tax lawyer David Rotfleisch, partner at Rotfleisch & Samulovitch P.C. He says that CRA collection officers are empowered to seize and liquidate assets in situations of significant tax bills without a court order. He expects the COVID-19 moratorium on CRA collections is likely to end soon. Illiquid investors with portfolios still in recovery mode after the March crash may be particularly vulnerable to the tax man. Rotfleisch says that portfolios are particularly hard to protect, but in partnering with a tax lawyer, advisors might be able to protect their vulnerable clients.

“CRA collection officers have the ability to seize assets without a court order,” Rotfleisch says. “All they have to do is issue an assessment. They can then go and enforce that assessment in any way they want to they can seize your house, they can seize your bank accounts, they can seize your investment portfolio. It’s fairly shocking.”

Rotfleisch says this situation arises when someone files a tax return only to receive a polite letter from the CRA saying ‘you owe us.’ He says that the CRA is unlikely to seize assets for something like $1,000. They may take action over a $10,000 bill and they certainly will move over something on the scale of $100,000. In those cases, Rotfleisch says the collection agents are going to “get nasty.”

Private corporations, too, have exposure and clients can be assessed as a corporate director, especially for GST liabilities. If a client has GST owing and chooses not to pay this quarter, the CRA is empowered to come in, do an assessment, and start seizing assets. While income tax collections can be delayed by filing a notice of objection, Rotfleisch says that GST collections have no such protections.

“Even if they are wrong, and even if you challenge it, they can and we'll go ahead and enforce by seizing your accounts,” Rotfleisch says.

While CRA collections were suspended in March, Rotfleisch says that collections will be back in the saddle “very soon” and he’s not sure if they’ll operate under instructions to take it easy because of the pandemic or to run in like a bull in a china shop.

In the meantime, he says that advisors can take significant steps to protect their clients. The most important, Rotfleisch says, is assessing their situation and connecting them with a tax lawyer. Advisors need to look out for clients with liquidity issues and portfolios in recovery mode, as they are the most vulnerable.

When defending clients from CRA collectors, Rotfleisch tries to negotiate payment arrangements acceptable to the collection officer that the client can afford. He says this process is tricky, and often involves escalating the matter to the supervisor level as frontline collections officers often won’t accept anything but a full lump-sum payment.

Investment portfolios are tough to defend, Rotfleisch says that collections officers will want to liquidate the portfolio quickly. They take the view that if you owe taxes you should be liquidating your portfolio immediately to pay them off.

While advisors play a key role in the assessment and information side, Rotfleisch says that these negotiations go best with a tax lawyer on your side. He says that the CRA collections officers are “absolute bullies” and despite the upfront cost it’s crucial to have someone on your client’s side who knows exactly what these officers are and are not empowered to do.

Rotfleisch says that most of his clients in these cases come through their financial advisors. A proactive advisor will connect their client with him and Rotfleisch is able to do a quick assessment and develop a strategy from there, often hinging on a quick upfront lump sum partial payment to appease the officer before transitioning to a payment schedule the client can afford. While portfolios are hard to defend, the vulnerability of investments after the COVID crash may provide an argument that will protect client’s investments from the CRA.

“A portfolio is a tough one because if you've got a portfolio that can be liquidated, they're going to aggressively push you to liquidate that and pay them off,” Rotfleisch says. “Their view is ‘why do you have an investment portfolio when you will owe us money? You should pay us off first.’ Now the answer in this case, is that we took a hit because we have some COVID exposed stocks and until the stock market has recovered it’s not advantageous to liquidate. Instead, we'll try and work this out over the next few months.”

In Rotfleisch’s view there is one big step advisors can take to prepare their clients should the CRA agents come knocking at their door.

“Contact a tax lawyer.”