Can You Negotiate and Pay Less Tax Debt in Canada?

Is it Possible to Reduce Canada Revenue Agency Tax Debt?

Canadians who owe tax debt often have difficulty paying it. One major reason why is that the Canada Revenue Agency (CRA) charges compound daily interest starting on the after day a tax debt is due. This interest is charged until the debt is paid in full. If you owe tax debt for previous years, the CRA continues to charge interest on these debts and any payments you make are applied to the older debts first. Compound daily interest charges can add up quickly, especially if you owe a large amount of tax debt.

If the CRA assess or reassess your tax return and determines that you owe more than you paid when you filed your taxes, you could be charged interest dating back to when the taxes should have originally been paid. This could potentially be very costly.

Large amounts of tax debt often lead people to wonder if it is possible to negotiate with the CRA to reduce the amount owing. With some other creditors (such as credit card companies, for example) you may be able to contact them, let them know that you are having trouble paying your debt, and ask if they would be willing to accept less. In some scenarios, these other creditors may agree. However, the CRA will not agree to accept less than is owed to it through negotiation. It expects to receive the full tax debt that is owed.

Negotiating with the CRA

While you won’t be able to reduce the total amount you owe, if you contact the CRA and let the agency know that you are having trouble paying your tax debt, you may be able to arrange a payment plan. This means, for example, that you could make monthly payments to the CRA over the course of a year rather than be responsible for paying your tax debt in one lump sum.

However, in most cases, even if you are able to come to a payment arrangement, you will still be required to pay any interest and penalties that you owe. In addition, it’s important to know that the CRA considers debt owed to it to be the top priority. Before agreeing to any payment plan, the agency may request significant financial disclosure from you. This could mean supplying the CRA with details on your income, expenses, budget, and other financial information. The agency will then use this information to determine how much it thinks you can pay each month based on the numbers it has. A possible issue with this is that the agency could determine that you are spending “too much” (in the agency’s eyes) to pay off your credit cards (for example) and propose a plan that sees you make only the minimum payments on your cards so you have more money to pay the CRA. This could mean you’ll end up paying a lot of interest on your credit card debt. However, since the agency prioritizes debt owed to it, it may not be willing to accept any other plan.

CRA negotiators are very experienced and use the threat of CRA collection actions (such as wage garnishments or frozen bank accounts) to influence negotiations. Since you almost certainly do not want your bank account frozen or your pay garnished, you’ll likely agree to what the CRA proposes, even if it complicates your financial situation.

Reducing Interest and Penalties on CRA Tax Debt

In some cases, you may be able to have interest and penalty charges reduced or eliminated on your tax debt. However, this only applies in specific situations where a taxpayer was prevented from meeting their tax obligations due to circumstances beyond their control as well as in some situations of extreme financial hardship.

For instance, if a taxpayer could not file or pay their taxes on time due to natural or human-caused disasters, civil disturbances, serious illness or accident, or a death in the immediate family, the CRA may be willing to provide relief from interest or penalties. Penalties and interest may also be waived or cancelled in situations where processing delays, errors in CRA materials, or incorrect information prevented a taxpayer from meeting their tax obligations.

In situations of severe financial hardship, the CRA may also consider waiving or cancelling interest and penalties. This includes instances where interest charges represent a significant portion of the outstanding debt or situations where paying the accumulated interest would result in an inability to afford the basic necessities of life.

As you can see, situations where the CRA will consider relief are quite narrow and strict. You will need to provide proof if you wish to have the CRA consider your situation under one of the above relief scenarios. When combined with the fact that the agency will not accept less than it’s owed and that it is often quite strict with payment plans, it becomes obvious that paying off tax debt can be difficult.