Self-employment and tax debts: How to overcome them? – A real-life case study

Aside from a lack of work and other challenges, one of the greatest risks for self-employed individuals is their responsibility for income taxes and sales taxes. Indeed, independent workers must navigate a complex tax environment, where tax debts can arise unexpectedly and pose significant financial challenges.

These professionals often find themselves facing unexpected tax debts, which can have disastrous financial consequences. Pierre Fortin, President and Licensed Insolvency Trustee at Jean Fortin & Associés, highlights the financial challenges encountered by self-employed workers and potential solutions through the true story of Cédric**, when faced with unexpected tax debts.

Financial risks for the self-employed

Cédric, 35, has been a self-employed graphic designer for 6 years and files his own tax returns. Since he is not incorporated, all his financial transactions go through the same account. Last month, he received a reassessment notice from Revenu Québec for the years 2020, 2021, and 2022, regarding expenses he was apparently not entitled to deduct. As a result, the tax authorities are demanding a substantial sum of $23,717.85, including penalties and late fees. With his life partner on parental leave due to her pregnancy with their second child, this bad news could not have come at a worse time.

Here is a list of the main financial risks and challenges faced by self-employed individuals:

• Income instability: The significant fluctuation in income can make long-term financial planning difficult.
• High tax burden: The responsibility of paying one’s own taxes can lead to considerable tax obligations, including business income tax and sales tax contributions.
• No social benefits: Unlike employees, self-employed workers do not benefit from advantages like health insurance, unemployment insurance, or paid leave, making financial management more challenging.
• Business-related costs: The self-employed often have to bear the costs associated with running their business, such as office expenses, supplies, equipment, and professional insurance.
• Risk of non-payment by clients: They may also face the risk of delayed payments or not being paid at all for their work.
• Retirement planning: The self-employed must proactively save and invest for their retirement, as they do not have access to employer-sponsored pension plans.

Cédric had financially prepared for the reduced family income due to the arrival of their second child, but his partner’s parental leave and his unexpected tax debt were unwelcome surprises. If this situation resonates with you, feel free to ask questions or schedule an appointment today. We also encourage you to continue reading to discover the financial solution Cédric turned to in order to handle his government debt.

What are the consequences of tax debts for self-employed workers?

When the government closely scrutinizes a business’s expenses, it often results in a tax reassessment. This situation typically arises from either genuine errors made by the entrepreneur or their accountant, or from differences in the interpretation of tax laws, which, admittedly, are very complex. This leads to an unexpected debt and makes it difficult to obtain a loan from a financial institution to pay it off. What are the consequences of such situations?

The government establishes its own laws, making it easy for them to structure them in their favor. Although it is possible to contest a reassessment notice, the burden of proving its invalidity falls on the taxpayer. In the case of a sales tax reassessment, immediate payment is required, even if one files an appeal in court.

Once the amount owed is confirmed, the government can proceed with bank account seizures, asset garnishments, or even place a legal lien on the residence or other properties. The available recovery methods are numerous and can be implemented much more quickly than those available to an ordinary creditor.

What solutions are available?

Cédric did not have the financial resources to hire an accountant or lawyer to contest the reassessments. Even if he had, he was not certain of a favorable outcome. His bank refused to grant him a loan to repay the sum in question, and the government only offered a payment plan limited to 24 months, with interest. At a 7% interest rate, the monthly payments would amount to $1,061, a burden his business income could not support. Finding himself at an impasse, he contacted Jean Fortin & Associés to explore viable solutions for his unexpected debt.

Between bankruptcy and a consumer proposal as possible solutions, Cédric chose to opt for a consumer proposal. After discussions, it was agreed that a proposal of $18,000, payable over 60 months, would be an acceptable compromise for his creditors, as it represented a significantly higher amount than what they might expect to recover in the event of bankruptcy. The monthly payments of $300 were manageable for Cédric.

Once the consumer proposal is filed, all recovery actions and interest charges cease, including for government debts. Indeed, in the context of a proposal or bankruptcy, tax debts are treated the same as other debts. Discussions then took place between the Licensed Insolvency Trustee and a specialized department of the Ministry dedicated exclusively to insolvency cases (bankruptcies and consumer proposals).

Thanks to this process, Cédric was able to avoid seizures and the accumulation of fees and interest, finding a compromise that allowed him to continue his entrepreneurial activities and, most importantly, regain his peace of mind.

A few tips for the self-employed

• Not complying with tax laws will eventually catch up with you, and the bill can be very steep. Never let a tax debt linger.
• The government has several highly effective and rapid means to recover their claims. Do not underestimate them.
• Once a legal lien is registered on one of your assets, it survives even after bankruptcy or a consumer proposal. Therefore, it is essential to consult a professional (lawyer, accountant, trustee) quickly at the first signs of a problem with the government to avoid irreversible damage.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee

**The names of the individuals have been changed to protect their anonymity.