How Do I Get Rid of Tax Debt?
Tax debt can be difficult to pay down. Here are some strategies and tactics that can help
If you owe tax debt, you likely know how difficult it is to get rid of it. The Canada Revenue Agency (CRA) charges compound daily interest on outstanding tax debt, making it very difficult to pay off debt if you owe a large amount or if you have owed for a while. Interest costs can certainly add up quickly in these situations.
However, taxpayers are required to pay the amounts that they owe, so it’s important to come up with a plan to pay your tax debt. Here are some tips.
The Easiest Way to Get Rid of Tax Debt
If you owe money to the CRA, not only can the agency charge interest, but it also has strong collection powers. This means, if you don’t pay, they can garnish your wages, freeze you bank account, seize and sell your assets, and take many other strong actions. Therefore, it’s important to resolve tax debt issues as quickly and accurately as possible.
The easiest way to get rid of tax debt is, obviously, to pay it. Look at your budget and see if there are any places where you can make cuts. If you’re able to reduce your spending enough that you can pay off your tax debt, you’ll make the CRA happy and remove a big burden from your shoulders. However, if you’ve looked at the numbers and you still can’t come up with a plan, there are options.
Why You Should Still File Taxes, Even if You Can’t Pay
Before discussing options to eliminate tax debt, it’s a good idea to clarify how important it is to file your taxes, even if you’re not able to pay what you owe right away. It’s not a crime to owe money to the CRA. However, in some situations, the CRA may consider it to be tax evasion if you don’t file when you’re supposed to.
In addition, if you don’t file your taxes or if you file late, the CRA can charge significant penalties. These penalties will make it even more difficult to pay the CRA what you owe, which is why it’s a good idea to file even if you can’t pay your tax debt right away.
Negotiating with the CRA
You may be able to negotiate a payment arrangement with the CRA if you can’t pay your taxes in full. For example, the agency may be willing to let you make payments over the course of a year to settle the debt rather than having to pay everything in one lump sum.
Depending on your situation, the agency may even agree to provide relief from interest charges and penalties.
However, this will likely only happen if certain conditions apply, such as if extraordinary circumstances prevented you from filing on time or if severe financial hardship has made it impossible for you to pay the interest on your debt.
There are other factors to keep in mind as well. The first, and potentially the most important, is that the CRA will still require the full amount of taxes to be paid. While the CRA might agree to reduce or eliminate the interest, the agency will never reduce the amount of tax debt owing.
In addition, in most cases, the CRA will continue to charge penalties and interest until your tax debt is paid in full.
This means that, even if the agency agrees to let you pay off your tax debt in monthly payments over the course of a year, it will still charge interest on the outstanding amount until you’ve made your final payment. This can be costly.
How a Licensed Insolvency Trustee Can Help
If you’re struggling with tax debt and unable to come to an agreement with the CRA that is financially doable for you, a Licensed Insolvency Trustee could provide you with options that may help. For instance, tax debt can be included in bankruptcy and consumer proposal filings.
If you decide that either of these insolvency processes make sense for you, interest charges will stop as soon as you file. The CRA will also not be able to take any legal action against you (such as freezing your bank account) once you file for bankruptcy or consumer proposal, and any action that it has already taken must be stopped.
To find out if bankruptcy or consumer proposal make sense for you, speak with a Licensed Insolvency Trustee. A trustee can review your situation, determine what options are possible to help you eliminate your debts (including your tax debt), as well as administer insolvency processes if this is how you choose to proceed. Most trustees offer a free consultation.
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