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What Happens if I Owe CRA More Tax Debt Than I Can Afford to Pay?

If you can’t afford to pay your tax debt, there are things you can do. Here are some tips and strategies.

How to Deal with More Tax Debt Than You Can Afford

Most people who have tax debt are able to repay what they owe. However, in some cases, a person will have so much tax debt that they won’t be able to afford it. This is especially true in cases where a return has been reassessed. If this happens, you could suddenly be faced with a large tax bill that you didn’t expect.

To make matters even worse, you may find that you’ve been charged interest dating back to when your return was initially due. You might even be charged a penalty, depending on the situation. If this happens, you may owe a larger tax debt than you’re able to afford.

So, how do you deal with this situation? The answer will depend on your circumstances.

Handling Tax Debt you Can’t Afford to Pay

If you owe a tax debt to the Canada Revenue Agency (CRA), the agency expects it to be paid quickly. In fact, if your taxes are not paid on the day they are due, the agency will start to charge daily compound interest on your debt. The longer you take to pay it, the most you will owe.

However, if you still don’t pay your tax debt, the CRA can get much more aggressive. The agency has very strong powers that it uses to enforce compliance and get people to pay their tax debt. For instance, the CRA can freeze your bank account, restricting your access to your money and using the funds in your account to pay your taxes. The agency can also garnish your wages, meaning money that you are owed by employers or clients can instead be sent directly to the CRA. Clearly these are situations that no one wants. You don’t want to lose access to your own money or money that is owed to you.

So, what do you do if you have tax debt you can’t pay? Depending on your situation, there are options.

Make a Payment Arrangement with the CRA

If you don’t pay your tax debt when it’s due, the CRA will start charging compound daily interest on the outstanding amount. This means the longer you take to pay, the more you’ll owe.

Therefore, if you can’t pay in full, it makes sense to at least pay something, since you won’t be charged interest on the amount you’ve paid.

One way to do this is to set up a payment arrangement with the CRA. If you do this successfully, you’ll be able to make monthly payments and have them applied to your tax debt. You will, however, still be responsible for paying the full amount of your debt.

The CRA will not accept a payment plan for anything less than the full amount owing. Also, you may still be charged interest on the remaining tax debt until your total is paid in full.

In addition, the CRA might require you to show that you attempted to pay your debt in full by reducing your expenses before it will agree to a payment plan.

Negotiate with the CRA

As mentioned, the CRA’s preference is to have any tax debt paid as quickly as possible. However, in some situations, the agency may be willing to accept a monthly payment arrangement. This will allow you to pay your tax debt in monthly payments rather than in a lump sum. This can be helpful if you can’t afford to pay your tax debt right now.

However, there are several points to keep in mind about this possible arrangement:

  • The CRA may continue to charge interest on the remaining outstanding amount until you have paid your tax debt in full.
  • Before it agrees to a payment arrangement, the agency may require that you provide it with significant financial details. This could include information on your expenses, your debts, your spending, and much more. The CRA may also ask you to prove that you made every attempt to pay your tax debt in full before you requested a payment arrangement.
  • The CRA will never accept less than the full amount owed to it in a payment arrangement.

In some situations, the agency may reduce or eliminate the amount of interest you are being charged, but it won’t reduce the overall amount.

Request Taxpayer Relief

In some situations, the CRA may be willing to reduce or eliminate interest or penalty charges. This can help you afford to pay your tax debt. However, this relief will only be granted in certain circumstances, such as:

  • Extraordinary circumstances that prevented you from meeting your tax obligations.
    • This may include natural or human-caused disasters (fire, flood, civil unrest, etc.) or serious emotional or mental distress (such as a death in the immediate family)
  • Actions of the CRA such as processing delays, errors in CRA materials, or other such situations that were the primary cause for a taxpayer to file late or supply incorrect or incomplete returns
  • Situations where severe financial hardship has resulted in an inability to pay interest and penalties

Situations where the agency may consider relief include:

  • Circumstances beyond your control (fire, flood, illness, death of a close family member, etc.) that prevented you from filing or paying your taxes on time.
  • Disruptions in service, civil disturbances, or actions of the CRA that caused you to miss a deadline or make an error.
  • Serious financial hardship. If you can’t afford to pay your tax debt and still afford your basic expenses (food, shelter, etc.) due to significant interest and penalties being charged, the CRA may reduce or waive those charges.

The CRA may also warrant relief in other situations not described here. If you are considering applying for taxpayer relief, it is strongly recommended that you work with a professional to give yourself the best chance of success.

If you are considering applying for taxpayer relief, you will want to work with a professional. The CRA can be very difficult to communicate and negotiate with and having an experienced tax professional on your side will greatly increase your chances of success.

LITPro can help you to Reduce Your Debt By Up To 70%

    • You can keep your car, home, and RRSP
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Speak with a Licensed Insolvency Trustee

If you are unable to pay your tax debt, speaking with a Licensed Insolvency Trustee can be a good idea. A trustee can review your financial situation and provide you with information on the options available that could help solve your tax debt problem.

Trustees are also able to administer certain insolvency procedures, including:

  • Consumer Proposal
    • In a consumer proposal, the trustee determines what a fair offer to your creditors will be. In most cases, this offer will be for a portion of the debt owing. This offer is then sent to all your unsecured creditors (including the CRA) who will vote on whether they wish to accept it. If the creditors that are owed the majority of the debt vote to accept, then all of your unsecured creditors are bound by the proposal. A consumer proposal can include tax debt owed to the CRA and could be the right option to pursue if you are only able to afford to pay some of your tax debt.
  • Bankruptcy
    • Filing for bankruptcy is often considered the “last resort” for anyone struggling with debt. While bankruptcy is typically only filed once all other options have been considered, it can be the right option for some people. Tax debt can be included in a bankruptcy.

Each financial situation is unique, and there is no perfect option that works for everyone.

can help you determine how to proceed with your financial future and assist you in dealing with situations where you owe more tax debt than you can afford to pay.

Licensed Insolvency Trustees are individuals who have been licensed to provide information on debt relief options and administer insolvency processes. If you can’t afford to pay your tax debt, speaking with a trustee can be a good idea.

A trustee will review your situation and provide you with details on the available options. Trustees are required to provide information on all options, not just the ones that they would be responsible for administrating.

Tax debt can be included in bankruptcy and consumer proposal processes. While those options aren’t necessarily the right choice for everyone, if you can’t afford your tax debt due to significant financial issues, one of those insolvency processes may be right for you.

Most trustees offer a free consultation where they will conduct a review and give you information on your options. This can help you get the information you need to make a wise choice for your financial future.

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