Owing money to anyone can be intimidating. Owing money to the government, knowing that they have many more means at their disposal to access your money, is a whole other level of intimidating. That’s why, when tax time rolls around, and you find out that you owe money to the Canada Revenue Agency (CRA), it can cause so much anxiety and uncertainty.
This article will shed light on a few things:
- What to expect if you don’t pay your taxes on time.
- The options available if you don’t have the funds to pay your tax bill.
- How to set yourself up for success so future tax seasons will be less stressful.
Our hope is that by having this knowledge, it’ll ease some of the anxiety that comes along with tax time.
Why owing the CRA is different
There’s one main difference between the CRA and other creditors that’s important to take into account: the CRA can take collection actions without having to go through the courts.
Keep in mind that just because they can take action, it doesn’t mean they will. While late penalties kick in right away, they give delinquent taxpayers lots of opportunity to rectify the situation before moving on to more severe actions discussed below. They even have programs available to help those with tax debt get tax relief (more on that later).
All this to say that, while yes, owing taxes is serious, it’s not something that can’t be worked through. So breathe a sigh of relief, put together a tax payment plan, and then take it one step at a time.
Consequences of not paying taxes
Below are the measures the CRA takes when they can’t reach an agreement to pay back taxes with you or when the rules outlined in the Income Tax Act are not followed. The main rules of which are filing returns for income taxes and other tax documents like GST/HST returns.
Our main focus below is on the more severe consequences for not paying taxes. We would be remiss, though, if we didn’t mention that the first true repercussions for not paying taxes on time are late fees and penalties. These charges are incurred as soon as the tax deadline passes. They can add up quickly, so it’s best to avoid them as much as possible.
It’s also important to get tax debt resolved promptly. Not doing so could exacerbate the issue by way of indirect costs, like overdraft, NSF, and other fees. All of which are over and above the costs incurred by the original tax debt. Addressing tax debt early helps avoid these extra costs and leaves you with more options at your disposal to get the debt cleared.
Wage garnishment
If you owe taxes, the CRA may garnish your wages. Meaning they take their money owed from the source rather than waiting for you to pay. They do this by issuing a document known as a “requirement to pay” (RTP) to a third party that owes you money or holds your funds, such as an employer, a bank, or other business or person. This can include freezing your accounts. This third party is then required to give the CRA a set amount of money out of your funds before passing along the rest to you.
Credit score
The CRA typically tries to resolve the issue with you directly, but they will escalate if they don’t hear from you.
They can do various things, like hiring a collection agency, filing a lawsuit, and placing a tax lien on your credit report. All these will reflect in your credit score and appear on your credit report.
Tax liens
If your debt remains unpaid, the CRA may get a writ or lien to help cover the debt. This could be against any assets, including your car, boat, artwork, cottage, rental property, or house. Done successfully, they could seize the asset to sell it, or put a claim on a part of the funds earned from when you sell the asset.
Withhold tax credits
The CRA can withhold child tax credits, benefits from Canada Pension Plan or Old Age Security, GST credits, and tax refunds.
Options for paying off the debt
If you don’t have the funds to pay off your entire tax bill, don’t panic. There are many options to help. Below, you’ll find descriptions of the most common ones.
Contact the CRA
The best place to start is by talking to the CRA directly. They offer many ways to help those struggling with their tax debt. Some center around paying in installments so that your cash flow doesn’t get as strained. Others focus on eliminating the fees and interest charges that have accrued. The latter are mainly reserved for more extreme circumstances, such as health issues and job loss.
Before calling, consider doing some research with the CRA’s Payment Arrangement Calculator (PAC), and their Monthly Net Income and Expense Worksheet can help. This will give you a good sense of what to expect when you talk to them.
With that done, call them to ask about putting together a payment plan that works for you. Once a payment plan is in place, stick to it! Make it a priority payment. If money gets tight and you’re unsure if you can keep up with the payment, contact the CRA immediately. Your show of good faith by communicating early and being transparent will make them way more willing to make adjustments to the payment plan.
Home equity
You might be able to borrow money secured by the equity in your home to pay off the tax debt. Loans secured by home equity typically have lower interest rates than other loans. might be able to borrow money secured by the equity in your home. Loans secured by home equity typically have lower interest rates than other loans.
Friends and family
While not ideal, and it can be uncomfortable, there is the option of asking your friends and family if they can help you. Just be sure to set up a repayment plan you both agree on and then follow through with it.
Personal loan
Depending on your overall financial situation, there could be the option of taking out a loan to pay off the tax debt. For this to work, you’ll need to have good credit and enough income to be able to cover the cost. One of the main considerations with this option is the interest rate you’re eligible for. Ask yourself if the interest charges are worthwhile over another option.
Tax resolution firm
In particularly dire tax debt situations, a good option is to discuss your specific financial circumstances with a tax resolution firm. They specialize in working with the CRA to come up with a plan that will work.
Remission review
A remission order is a unique measure that is used rather sparingly. Remission provides relief from federal tax, interest, penalty, or other debt. This option is only really available once all other options have been tried to no avail. A successful review also typically requires extenuating circumstances.
Consumer Proposal or Bankruptcy
In Canada, a consumer proposal is an alternative to bankruptcy. A Licensed Insolvency Trustee negotiates this legally binding agreement with your creditors. With an agreement reached successfully, your tax debt is cleared, and a legal stay of proceedings protects you from any further legal action for payment.
Similarly, filing for bankruptcy can discharge tax debts and obligations, lift a bank account freeze and stop a payroll garnishment.m federal tax, interest, penalty, or other debt. Remission might receive consideration when relief is required but not obtained.
Preventing the same situation again
Take time to figure out how you got into your current situation. Understanding what got you there will help prevent it from happening again.
- Start a sinking fund to help cover your tax bill each year. This is a particularly useful strategy for self-employed people.
- Be prepared. Know your tax rate. Use an income tax calculator. File your taxes before the due date.
- Make sure to utilize all the deductions you’re eligible for.
- As your employer to increase the deductions on your paycheque so there’s less of a hefty bill at tax time.
- Last, but not least, ensure that you live within your means. Creating and sticking to a realistic budget will help you avoid surprises.
Conclusion
File taxes early to give yourself plenty of time to figure out a plan to pay, stay calm, and get help if you need it! Fortunately, there are many resources available to help figure out a solution. If you find yourself in a tax debt jam, most often the best course of action is to contact the CRA right away, keep the line of communication open, and be transparent about your situation. Already facing financial struggle because of tax debt? Our Credit Counsellors can help. Contact us today to work with them to come up with a pathway to debt-free living.
