Third Party Payment Demands to your clients are one of the many tools in the CRA toolbox. When a small business has been running a large tax balance for several years, the Taxman can suddenly get tired of waiting to be paid. Without warning he will send letters to or, even worse, visit your principal clients to serve them with Third Party Requirement to Pay letters. This is a legally binding demand that any monies due to be paid to you must instead be paid directly to the tax authority – federal or provincial. If your clients defy the order and continue to pay you, they may be held liable for the unpaid tax balance.
How does the Taxman know the names of your clients? We see a pattern in which the CRA demands to see your books and records for a “trust audit”. The auditor visits your premises to check that you are reporting and filing accurate source deductions or HST remittances. At the same time, he is reviewing your invoices, he is gathering the names and addresses of your clients. Then, when he determines you’re not likely to be able to pay off your tax bill in full within the next 12 to 24 months, he goes straight to your clients to collect and force you into bankruptcy.
Before you panic and fall into the bankruptcy trap, consider retaining experienced legal tax counsel. In cases such as this, we consider the value of an injunction in the courts for a stay of collection action to permit you the time to organize your finances to address the tax debt. Where circumstances warrant, we also seek cancellation of penalties and interest through submission of an application for Taxpayer Relief. This protects your legal right to due process, as set out under section 220(3.1) of the Income tax Act and/or section 281(1) of the Excise Tax Act.