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If you owe tax debt to the (Canada Revenue Agency) CRA and cannot pay, your first instinct might be to skip filing your taxes and ignore the CRA completely, hoping that you will get lucky and the Agency won’t notice.
Unfortunately, this is not a good course of action. The CRA is a powerful institution that does everything in its power to identify debtors and recover tax debt. Not filing your taxes may be considered tax evasion and may lead to unpleasant complications, such as harsh collection efforts, wage garnishments, account freezes, and even jail time.
However, there are several things you can do if you owe taxes to the CRA and can’t pay. Read on to learn more about the consequences of not paying your taxes in Canada, and discover your options if you’re unable to pay your tax debt.
How To Know If You Owe Taxes Canada
The first step in finding out how much you owe the CRA is to file your tax returns. The CRA does not deal with individuals who have outstanding unfiled tax returns, so this step is mandatory.
You should also make an effort to file your tax returns on time to avoid the late filing penalty. For most Canadians, this means that they should make an effort to file their personal income tax returns before the April 30 deadline. If you and/or your spouse/common-law partner are self-employed, you can file your taxes by June 15.
This is an important first step because not filing your tax return on time leads to a penalty of 5% of the balance owing, plus an additional 1% for each full month that passes until you file your tax return, to a maximum of 12 months.
Once you file your tax return, the CRA will send out a Notice of Assessment confirming the balance owing for the years filed, including any penalties and interest accrued. And if you owe tax debt, the CRA will send you a letter asking you to contact the Agency or arrange payment.
An easy way to find out how much you owe is to log into the CRA’s My Account for Individuals tool:
- After logging into your account, go to the top of the page and click on Accounts and Payments.
- Click on Account Balance and Statement of Account.
- This is where you can find your account balance.
Paying Back Tax Debt in Canada
Now that you have an accurate idea of how much money you owe, it’s time to determine whether you can repay your tax debt on your own, and how to do it.
Canada Revenue Agency Payment Arrangements
If you believe you can afford to repay your debt on your own, you can contact the CRA via the CRA’s automated TeleArrangement service to agree on a tax repayment plan. CRA may agree on payment arrangements with debtors who can repay the balance owing within one year.
Installments or Partial Payment
Tax installments represent payments you make over the course of one year in order to cover the taxes you would normally pay in a lump sum payment on April 30 or June 15.
To set up a payment plan, contact the CRA and work with a collection officer to agree on a payment arrangement plan that works for you. CRA will consider a payment plan if you can prove that you’ve tried to repay your debt in full but without success.
However, it’s important to know that a payment arrangement is not without its downsides. When you reach an agreement with the CRA, you’re obligated to pay as agreed, file your returns on time, and stay up to date on your payment obligations. CRA may review your payment arrangement periodically.
And even if you make payments according to your arrangement, the CRA is authorized to withhold amounts from your benefits or credits. If your financial situation changes and you cannot meet your obligations, the CRA may proceed with legal action to collect the amount owing.
Request Taxpayer Relief
CRA may grant relief from interest or penalties if taxpayers cannot meet their tax obligations due to:
- Inability to pay or financial hardship
- Actions of the CRA
- Extraordinary circumstances
- Other circumstances
Note that it may take up to 15 months for CRA to process your request.
Take Out a Loan, or Use Credit
You can take out a personal loan or use credit to repay your tax debt and avoid the stress of having to deal with the CRA. This is usually a good idea if you have a good credit score, but it’s not recommended if your credit score doesn’t allow you to take out advantageous loans or if you would encounter difficulties repaying the loan.
Debt consolidation represents the process of merging multiple debts into a single, larger one that is more manageable. You can find out more about debt consolidation here.
Use the Equity in Your Home
You can use your home equity to repay your tax debt. However, it’s recommended that you contact an experienced mortgage broker to do so. Traditional lenders may be reluctant to lend you money if you have CRA debt. But they may agree to refinance your mortgage, allowing you to repay your debt in full.
Options if You Can’t Pay Back Your Taxes in Canada
If you explored the previous payment alternatives but think that none of them can help you pay your outstanding tax debt, there are still some options that can help.
Consumer proposals are legal agreements that are negotiated between you and your creditors, in this case, CRA.
Consumer proposals can help:
- Reduce your total debt, including the interest charges, sometimes by up to 75%
- Stop all collection efforts
- Settle all unsecured debt
- Consolidate your debts into one manageable payment.
It’s important to know that only Licensed Insolvency Trustees (LITs) can administer consumer proposals. You can learn more about how consumer proposals work here.
Bankruptcy is a legal process for eliminating debt, including the money you owe to the CRA. Most personal bankruptcies exempt certain belongings from seizure, and you may keep your car and house when filing bankruptcy.
- Eliminates your debt
- Protects you from collection efforts
- Protects you from legal actions
- Stops wage garnishments
- Protects most of your assets
Bankruptcy has a negative connotation, but it’s a legal process that can help you return to financial stability. You can find out how bankruptcy works here.
Consequences of Not Paying Your Taxes in Canada
CRA is a powerful institution that uses its abilities to recuperate money from debtors. The consequences of not paying your debts or refusing to cooperate can be severe.
The CRA will only start legal action against you after making three attempts to give verbal warning via phone and sending a written warning letter. If you fail to cooperate, the CRA will try to recover the debt by:
Garnishing wages and other sources of income
CRA has the ability to require third parties that hold money for you to redirect some of your funds to the CTA. These third parties can be employers, banks, and a variety of other sources of funds. For example, an employer may have to garnish your wages, while a bank may have to freeze your bank account.
After they receive a requirement to pay, the third party has the legal obligation to comply or become liable for the amount you owe.
Asset liens and seizures
CRA can recover its money with asset liens and seizures. The CRA can make your debt public by getting a certificate confirming what you owe. Then, the CRA notifies you via mail that your debt is certified in Federal Court, warning you to repay your debt. If you don’t do so, the CRA proceeds with asset liens and seizures.
Registering a lien on your asset means that the CRA will get priority in case of a sale. This means that, if you sell your asset, the CRA will automatically withhold your tax debt from the proceeds before you receive it.
If there is no sale and your debt is outstanding, the CRA can seize and sell your assets. If this happens, the proceeds will be split between paying your tax and covering the costs of having a bailiff sell your assets. If the sum generated by the sale doesn’t cover the unpaid taxes, you will still owe money for the remaining balance.
If you don’t file your tax returns and are accused of tax evasion under the Income Tax Act, you may receive a fine of up to 200% of what you owe and up to a maximum of two years in jail.
However, not filing your tax returns may, in some cases, lead to a fraud charge under the Criminal code. A fraud charge can be punished with up to 14 years of jail.
We can help.
Contact one of our Licensed Insolvency Trustees and find out how you can repay what you owe. We offer free, confidential, no-obligation consultations. Take your next steps toward tax debt relief today.