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How to Solve Tax Debt Problems

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Income Tax Debt Relief Option

If you owe an income tax debt to the Canada Revenue Agency (CRA), the agency begins charging interest the day after it’s due. This interest is charged daily, so the longer you take to pay your tax debt, the more you owe. One thing is to know is that the CRA won’t forget about you. If you owe taxes, the agency will do everything it can to collect. And the CRA has very considerable powers.

Unlike other creditors, the CRA can garnish your wages and freeze your bank account without going to court and getting a judgment against you. This means they can make money from your employer, your clients, and even the money you have saved in the bank. Then it can use this money to pay off your tax debt. Obviously, this isn’t a situation that you want to occur.

The CRA can also take money that other government departments and agencies would have given you. For instance, it can take any GST/HST credits you may be owed.

If the CRA does get a court judgment against you, it can even seize your assets and use the money it generates from the sale to pay off your tax debt. If this happens, you’ll need to pay the costs associated with the sale. Plus, if the sale doesn’t generate enough money to pay off your tax debt, you’ll still need to pay the outstanding money.

These are obviously situations that no one wants to end up in. So, what do you do if you owe tax debt and you can’t pay it? Depending on your situation, there are a few potential options.

Ways for Dealing with CRA Tax Debt

The most straightforward way to deal with tax debt is to pay what you owe. However, if you owe a large amount or if you owe more than you expected to owe, paying your debt in one lump sum can be very difficult. However, as mentioned, the longer you take to pay, the more interest you will be charged. Therefore, it’s in your best interest to deal with your tax debt as quickly as possible.

If you can’t pay your income taxes in full, you may be able to negotiate a payment arrangement with the CRA. In some situations, the agency may be willing to make monthly payments rather than a single payment. However, note that the CRA may still charge interest on the outstanding tax debt until your taxes have been paid in full.

When you contact the CRA to discuss a payment arrangement, the agency may ask you to prove that you attempted to pay your tax debt in full before you contacted them. This could mean you’ll have to show the CRA your budget and provide the agency with detailed financial information to explain your situation. Also, it’s important to note that the CRA will never accept an arrangement that sees you pay less than the full amount of tax debt you owe. Unlike some other creditors (such as credit card companies, for example) the CRA won’t negotiate to accept a reduced amount. This is because the CRA has significant collection powers, as noted. If you don’t pay and you’re not able to come to an agreement with the agency, it can and will take serious action against you.

Income Tax Debt Relief Options

In some situations, the CRA may be willing to reduce interest and penalty charges. However, this is only possible in instances where unforeseen circumstances prevented a taxpayer from meeting their tax obligations. For instance, if an injury, illness, natural disaster, civil disruption, or incorrect information from the CRA caused you to file your taxes late or pay your tax debt late, the CRA may consider reducing or eliminating the penalties. However, as mentioned, the agency will not reduce the amount you owe. It may reduce only interest or penalty charges.

If you decide to seek interest and penalty relief from the CRA, it is strongly recommended that you work with an experienced professional. This will give you the best chance of success.

Talking to a Licensed Insolvency Trustee can also help you deal with tax debt issues. Trustees are the only ones who can administer insolvency processes like bankruptcies and consumer proposals in Canada. These are legal processes, so you are protected from creditors and creditor collection action when you file. This means the CRA can’t take you to a court or freeze your accounts once you file. If garnishment is already in place, it must stop when you file.

Tax debt owed to the CRA can be included in bankruptcy and consumer proposal processes. Speaking with a trustee can help you determine if either option is the right choice for you. Most trustees offer an initial consultation and review at no charge.

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