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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.

Tax debt can be difficult to pay off. The longer you take to pay, the more daily interest that the Canada Revenue Agency (CRA) will charge. If your tax returns are reassessed, you may find yourself responsible for paying an unexpected tax debt plus interest dating back to the date that the taxes should have been due. A situation like that one makes it even tougher to pay what you owe.

These difficulties lead to some people being unable to pay the taxes they owe and, in some cases, causes them to give up trying. However, while it can certainly be very tough to pay off a large tax debt, the potential consequences of not paying your taxes can be even more severe.

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 are used to collect a tax debt, including:

  • Taking amounts owed to you by another government agency and applying these to 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 paycheque) 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 take 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.

What Happens if you Don’t Pay Your Taxes?

If you owe a tax debt and don’t pay, the CRA begins to charge interest on the debt as soon as it is past due. The agency will also begin to send you notices requesting payment. If you ignore these notices, the CRA can take collection action against you.

The CRA has very strong powers that it can use to collect on tax debt that is not paid. For instance, the agency has the ability to seize your assets, freeze your bank account, garnish your wages, put a lien on your house, and more.

The CRA will not just “forget” about your tax debt. If the agency hasn’t contacted you yet regarding your debt, do not take this to mean that you will never be contacted. The CRA wants to collect all of the tax debt that is owed to it and it will come calling eventually.

There is also the chance that the CRA could consider your situation to be tax evasion.

What is Tax Evasion?

Tax evasion is a crime that occurs when a taxpayer purposely ignores Canada’s tax laws. While it is unlikely that you will be charged with tax evasion if you file your taxes and do not pay, it is a possibility that this will happen. For instance, “tax protestors” (those who believe they do not have to pay taxes on their income) have been charged with tax evasion.

Penalties for tax evasion can be very severe. If you are convicted of tax evasion, not only will you have to pay the tax debt you owe, but you will also need to pay interest and civil penalties. You may also be fined up to 200% of the taxes evaded. The courts can even potentially impose a prison term of up to five years.

What to Do If You Can’t Pay Your Tax Debt

If you owe tax debt and are unable to pay, one option is to negotiate a payment plan with the CRA. This can be difficult to do as the agency negotiators are very tough to deal with. In many cases, they would much rather you pay your debt in full than pay it in monthly payments.

You may be required to prove that you tried to pay your tax debt in full by cutting costs and even borrowing money. To prove this, the CRA may ask for significant financial disclosure, such as details on your income, expenses, and more.

If you wish to negotiate with the CRA, it is best to have an experienced professional on your side.

Another option for those who are having difficulty paying their tax debt is to speak with a Licensed Insolvency Trustee. Trustees are specially trained and licensed by the federal Office of the Superintendent of Bankruptcy to provide people with financial information and administer certain insolvency processes.

If you are having trouble paying your tax debt, meeting with a trustee can help. They will review your financial situation and give you details on the options that are available to you.

Tax debt can be included in a consumer proposal or bankruptcy if this is how you choose to proceed. These legal processes offer protection from collection action and legal action. This means, if you file, the CRA must stop any collection or legal action that has been started against you. This can be a big relief for anyone who has had their wages garnished, their bank account frozen, or any other action taken against them.

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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.

Is Not Paying Tax Debt an Option

Alternatives to Not Paying Tax Debt

If you owe money to the Canada Revenue Agency (CRA), the agency will not forget about you. Despite what some people may think, not paying tax debt isn’t an option. The agency considers the money that is owed to it to be a top priority and it can take very strong collection action against anyone who owes tax debt. The CRA is a powerful agency and one that has powers that other creditors do not.

If you don’t pay your tax debt and don’t cooperate with the CRA, the agency can garnish your wages, freeze your bank account, register your debt in court then seize your assets, and much more. Obviously, you don’t want this to happen to you. This means you’ll need to have a plan for paying off your tax debt.

Options for Dealing with Tax Debt

The easiest option for dealing with tax debt is to pay what you owe. However, if this isn’t possible, the CRA may be willing to accept monthly payments. To arrange for this, you will need to contact the CRA, inform the agency that you are unable to pay your taxes in a single payment, and agree to a monthly payment schedule.

The CRA may require proof that you attempted to pay your tax debt by cutting your budget, reducing expenses, and borrowing money. This means you may need to provide the CRA with details on your income, your expenses, and other financial information.

The longer you take to pay a tax debt, the more you will be charged in interest. The CRA charges compound daily interest on all outstanding amounts, so if you have owed taxes for a while, you could be faced with significant interest charges. In addition, if you filed late, you could be facing penalty charges as well. Interest often continues to accumulate on the unpaid portion of the debt, even if you are making monthly payments.

Under some circumstances, the CRA may be willing to reduce or eliminate interest and penalty charges. However, this is only possible in situations where the taxpayer is unable to meet their tax obligations due to specific reasons. Situations, where relief may be granted, include:

  • Natural or human-made disasters (fire, flood, civil unrest, etc.) that prevented a taxpayer from filing or paying on time.
  • The death of an immediate family member or other significant emotion or physical distress.
  • Actions of the CRA that prevented a taxpayer from meeting their tax obligations (such as incorrect information provided by the CRA).
  • Significant financial hardship (such as a job loss, a situation where interest and penalties make up a significant portion of the outstanding amount, or circumstances where paying the interest and penalties would result in a taxpayer being unable to afford basic necessities).

The CRA may also be willing to provide relief in situations other than the ones listed.

Does the CRA Ever Forgive Tax Debt?

Not paying tax debt has consequences.

There is a tax debt collection limitation period in place, however. Each tax debt has a 6- or 10-year collections limitation period, depending on the type of debt. After this period ends, you still owe the debt, but the CRA cannot take collection action against you. However, this limitation period can be restarted or extended when certain events occur, such as if the CRA takes action to collect the debt. This means if you owe a tax debt for five years, for example, and the CRA issues a garnishment to collect the debt, the limitation period restarts.

As you can imagine, it is incredibly unlikely that the CRA will not take any action against you for the entire collections limitation period. The agency will want to collect the money that is owed.

If you owe tax debt, you might be wondering if the CRA will ever forgive the debt. The answer is no. As mentioned, the CRA will not “forget” about your debt and it will not forgive it either.

In fact, not only will the CRA not forgive tax debt, but it will also not agree to take less than is owed to it. While you may be able to arrange a payment plan, and you might (in certain circumstances) get the agency to reduce or waive interest and penalty charges, the CRA will never agree to a negotiation that sees it receive less than is owed to it.  

So, what can you do if you’re unable to pay your tax debt? Speaking with a Licensed Insolvency Trustee can help. A trustee can give you information on the options that are available to you and can administer bankruptcy and consumer proposal processes if that is how you choose to proceed. Tax debt can be included in these processes, which means they can help you get your tax situation under control.

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