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How Do You Solve Tax Debt Problems?

If you owe money to the Canada Revenue Agency (CRA) it can be tough to pay this tax debt. That’s because the CRA charges compound daily interest on all outstanding tax debts, as well as penalties for filing late. These charges can mean that the longer you go without paying your tax debt, the more you owe and the more difficult it becomes to pay. When you add this to the fact that the CRA has very strong collection powers, it becomes obvious why many people stress about paying their CRA debts.

If you owe tax debt, the agency is able to garnish wages, freeze bank accounts, seize property, and much more to collect the money that is owed. Of course, no one wants this to happen. The CRA knows this and it uses the threat of these actions to influence negotiations.

Why Negotiating with the CRA is Difficult

If you owe a tax debt and are having trouble paying it, one option is to contact that CRA and attempt to arrange a payment plan. However, in practice, this can be more difficult than it seems. That’s because the agency treats tax debt owed to it is as the most important debt and it places this debt ahead of all others.

Since it knows that people do not want to risk having their wages garnished or assets seized, it can often get taxpayers to agree to unfavorable terms if it means avoiding CRA collection actions. Unfortunately, if you agree to a very aggressive payment plan with the CRA, you may have trouble affording your monthly expenses and paying off your other debts. This could mean taking on more credit card debt to make ends meet.

Another reason why it is difficult to arrange a suitable payment plan with the CRA is that the agency will never accept less than 100% of the tax debt that is owed to it. In certain situations, it may agree to reduce or eliminate penalties and possibly even interest charges, but it won’t budge on the amount owing.

While other creditors may be willing to accept a smaller amount rather than have a person default on a loan, the CRA wants everything that is owed to it. Again, this is because the agency knows that it has the ability to take strong actions to collect a tax debt.

How to Afford Your Tax Debt

As mentioned, the CRA will only accept 100% of the amount owed to it during a payment plan negotiation. However, if you are not able to afford the full tax debt, there may be an option available to you.

A consumer proposal is a legal process through which you make an offer to all your unsecured creditors to repay a portion of what you owe in exchange for the rest of the debt being eliminated. If the creditors that are owed 50% of the outstanding debt or more agree to accept the terms of the proposal, then all unsecured creditors are bound by the proposal. A consumer proposal can include tax debt owed to the CRA.

What are the options to deal with CRA Tax Issues?

The consumer proposal process can be an option for those who are unable to pay back everything they owe, but who are able to pay some of their debts. If this sounds like your situation, the first step is to meet with a Licensed Insolvency Trustee (LIT). These professionals are the only individuals who are able to administer consumer proposal processes. Most LITs will offer the initial consultation at no charge.

During this consultation, the trustee will review your finances and provide you with details on the options that are available. It is then up to you to decide how to proceed. If you believe that a consumer proposal makes sense, the trustee will determine what a fair offer to your creditors will be.

The trustee will then prepare this offer and present it to all your unsecured creditors (including the CRA). Unsecured debt is a debt that is not backed by an asset. Examples of unsecured debt include credit card debt, personal loans, lines of credit, and tax debt. Secured debt (such as mortgages and automobile loans) cannot be included in a proposal.

Once the creditors receive the proposal, they will vote on whether they wish to accept it. As mentioned, if those creditors that are owed more than 50% of the debt accept, all must abide by the terms. It is then your responsibility to make monthly payments as outlined in the proposal. If you make all your payments, the proposal will be complete, and the remaining debt will be eliminated.

While a consumer proposal is not the right option for everyone, it can be a good way to resolve debt problems (including tax debt problems) in certain situations. Contact us for more information.