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What Happens if You Don’t Pay a Tax Debt?

 

How to Handle CRA Tax Debt – What You Should and Shouldn’t Do

If you don’t pay your tax debt when it’s due, the Canada Revenue Agency (CRA) begins to charge interest. This interest is compounded daily, so it can very quickly add up to a large amount. There is also the fact that the CRA can reassess a return later and make you pay interest on a tax debt you might not have even known about.

Dealing with the CRA can be difficult, and paying off an expensive tax debt can be tough, so some people may start to think about what would happen if they didn’t pay their tax debt at all.

However, not paying a tax debt is a serious issue.

How the CRA Responds if you Don’t Pay a Tax Debt

If you owe taxes and do not pay, the CRA takes the situation very seriously. In the eyes of the agency, money that is owed in taxes is critical. The CRA can take strong action against anyone who does not pay their tax debt in full and on time and who refuses to cooperate. There are potentially serious financial and legal consequences of not paying what you owe in taxes.

It’s important to know that the CRA will not “forget” about your tax debt. Some people believe that if they stay quiet and avoid communicating with the agency, they won’t have to pay the taxes they owe. This is not true. The CRA is a very powerful agency and it has numerous collection powers that is uses to collect tax debt, including:

  • Taking amounts owed to you by another government agency and applying these to your tax debt
    • For instance, the CRA can take your GST/HST credit payment and apply this against your tax debt.
  • Garnishing your wages
    • The CRA can send a requirement to pay notice to any third party that owes you money. This includes your employer. If this happens, your employer will have no choice to comply and they will have to send money they should have sent to you (such as your pay cheque) to the CRA instead.
  • Freezing your bank account
    • The CRA can also send a requirement to pay notice to your bank. This means the bank will be required to freeze your access to your account and direct this money to the CRA to pay off your tax debt.
  • Seizing and selling your assets
    • The CRA is able to seize your assets, sell them, and use the proceeds of the sale to pay down your tax debt.

If any of these actions takes place, and the money the CRA gets from the collection action isn’t enough to pay your tax debt in full, you will still be responsible for paying the remaining amount.

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As you can see, the CRA takes outstanding tax debt very seriously. This means avoiding your debt and ignoring the CRA is not a good idea.

If You Can’t Pay Your Tax Debt

If you owe a tax debt and are unable to pay in full, there are a few options:

  • Negotiating with the CRA
    • While the CRA can often be tough to communicate with, you may be able to contact the agency and set up a payment plan. If successful, you’ll be able to make regular monthly payments until your debt is paid in full.
    • You will still be responsible for paying the full amount of the tax debt owing.
  • Requesting to have interest and penalty charges reduced or waived
    • In certain circumstances (such as if natural or human-made situations prevented you from meeting your tax obligations or in situations of serious financial hardship) the CRA may be willing to reduce or waive interest charges.
    • You will need to provide proof to verify your situation to the CRA. It’s strongly suggested that you work with a professional when making your case.
  • Speaking with a Licensed Insolvency Trustee
    • Tax debt can be included in consumer proposal and bankruptcy processes. In a bankruptcy, your unsecured debts are eliminated, and you are given the chance to start your financial life over. In a consumer proposal, you make an offer to your creditors that will see you pay a portion of the debt you owe.
    • A Licensed Insolvency Trustee can help you determine if either of these processes are right for you.

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