How to Handle Tax Debt and the CRA
A lot of Canadians owe tax debt, and, in some cases, these debts can get very large. This is especially true in situations where tax returns were filed late or where tax debt hasn’t been paid on time. The Canada Revenue Agency (CRA) charges significant interest on unpaid tax debt as well as penalties on returns that are filed late. These costs certainly add up and they can make it very tough to pay what you owe. The longer it takes you to pay your debt, the more interest you’ll pay, and that makes it even more difficult to afford your debt.
This situation can become even tougher since the CRA has incredibly strong collection powers that it uses to get taxpayers to pay their tax debt.
These powers include:
- Withholding or using other funds
- The CRA has the ability to redirect money that is owed by another government agency and use these funds against your tax debt. For instance, the CRA may take your GST/HST credit payment and apply it to your outstanding tax debt.
- Wage garnishment
- The CRA can send a notice to your employer or your clients, legally requiring them to send the money that they would have sent to you directly to the CRA instead. This money is then used to pay off your tax debt.
- If you earn an income and have taxes deducted at the source (which is the case for most employees) the CRA can garnish up to 50% of your wages. However, if you do freelance or contract work, the CRA is able to garnish up to 100% of the money that could have been directed toward your invoices.
- Freezing your bank account
- If you owe tax debt, the CRA is able to put a freeze on the funds in your bank account. This means that you won’t be able to access the money that you earned. The agency can then use your savings to pay off your tax debt.
- Seizing and selling assets
- The CRA is legally able to seize your assets and sell them, then use the money from the sale to pay off your tax debt. If this happens, you will have to pay the costs and charges that the CRA incurs from the process.
- Holding a third party responsible
- In some cases, the CRA is able to hold a third party (such as a business partner, director, or related corporation) responsible for tax debt.
As you can see, these powers are very strong. If you owe tax debt, not only could the CRA potentially take any of these actions against you, but CRA agents also use the threat of these actions to influence negotiations. For instance, assume you know that the CRA is about to garnish your wages or freeze your bank account. You’ll probably be a lot more likely to accept whatever payment plan you’re offered to avoid this, even if it’s one that doesn’t make financial sense for you.
What to Do About Tax Debt
If you have a tax debt, you’ll want to pay it (or finalize a plan to pay it) before the CRA takes significant action against you. Communicating with the CRA can be difficult since, as mentioned, the agency uses the threat of its powers to influence negotiations. It is recommended that you work with a professional when communicating or negotiating with the CRA. This will give you your best chance of success.
However, it’s important to note that even if you work with a professional, the CRA will never accept less than is owed to it. The agency may be willing to accept a payment plan, but only for the full amount.
Depending on your circumstances, filing for a consumer proposal or bankruptcy may make sense for you. These options are legal processes that are designed to help people reduce or eliminate their debts and rebuild their financial lives.
If you file a consumer proposal or bankruptcy, you receive legal protection from your creditors, which includes the CRA. The agency will not be able to take any collection action against you and any wage garnishments or other actions that are already in place must stop. Obviously, this can be a big relief to people who are struggling with tax debt.
Tax Debt Settlement: If You Can’t Afford to Pay Your Tax Bill
How to Pay Your Tax Debt
Tax debt can be very difficult to pay off.
If you find yourself owing a large amount to the Canada Revenue Agency (CRA) you might start to stress out and worry about how you’re going to pay this debt. This is reasonable. Not only is the CRA a large agency with a lot of strong collection powers, but it also charges penalties for late returns and compound daily interest on the outstanding tax debt. This means the longer it takes for you to pay what you owe, the more it’s going to cost you.
However, while paying off tax debt may seem impossible, it doesn’t have to be that way. Here are some tips that could help you pay off what you owe the CRA.
Negotiating with the CRA
When you owe a creditor money, and you’re not able to pay what you owe, one of the first steps is often to contact them and let them know your situation. Some creditors may be willing to accept less money from you since they’d rather get something than have you default on the loan and get nothing. However, this is not the case with the CRA.
If you owe tax debt, the agency will not accept less than is owed to it. That’s because the CRA has very strong collection powers. It can garnish your wages, freeze your bank account, or even seize your assets and use them to pay your debt.
That said, the CRA might be willing to agree to a payment plan. For this to happen, you’ll have to explain why you are unable to pay your tax debt right now. You’ll also likely need to provide the agency with significant financial disclosure (such as your income, your expenses, and information on your assets). Even if you are able to come to an agreement, the CRA will likely still charge interest and penalties on the outstanding tax debt until it is paid in full.
Using Taxpayer Relief Programs
In some circumstances, you might be able to apply for taxpayer relief programs. If you are accepted into one of these programs, you could potentially get relief from interest and penalties. However, to be accepted, you’ll have to prove that there is a legitimate reason. It could be that you are experiencing severe financial hardship.
If paying the interest and penalties on your tax debt is making it nearly impossible to afford your living expenses, the CRA may grant relief. The agency may also reduce or eliminate interest and penalties if you were unable to file or pay on time due to an illness, death of an immediate family member, a natural or human-caused disaster, a civil disruption, or errors in CRA materials.
However, as mentioned, the CRA will not accept less than is owed to it. Even if you are able to get relief of interest and penalties, you will still need to pay your tax debt in full.