Why Tax Debt is So Difficult to Pay Off & What You Can Do?

How to Deal with Large Amounts of Tax Debt

If you owe tax debt to the Canada Revenue Agency (CRA), it can become very tough to pay off this debt. There are many reasons why. The first is that the CRA charges compound daily interest on outstanding tax debt. This means the longer you go without paying your taxes, the more you will owe.

Unfortunately, the interest payments associated with tax debt continue to grow even if you make partial payments. The CRA continues to charge interest on all outstanding debts until the full amount is paid.

The agency’s insistence on receiving the full amount of tax debt owed to it is another reason why paying off a CRA debt can be so difficult. With many other creditors, you can explain your financial situation and they may be willing to negotiate with you. For instance, if you owe a debt and can only pay it partially, contacting the creditor and telling them can’t afford the full amount may get them to reduce the total.

Many creditors do this because they would rather receive some money than nothing (creditors typically get very little in a bankruptcy, for example). However, the CRA will never accept a payment plan that sees them receive less than the total amount owing.

The CRA may agree to a payment plan where they receive smaller monthly payments instead of a lump sum, but the agency won’t ever reduce the overall amount. In addition, as mentioned, you will pay interest on the remaining amount even if the CRA does agree to a payment plan.

Options for Dealing with Tax Debt

Since tax debt can often be very difficult to pay off, many people find themselves looking for ways to deal with these debts. On option is requesting relief from the CRA. In some cases, the CRA will reduce or waive interest and penalty charges.

• Reducing or eliminating tax debt penalties and interest
  • As mentioned, the CRA will never accept less than the full amount owing. However, in some situations, the agency will agree to reduce penalties and interest or potentially even waive these charges entirely. However, this typically only happens in situations where the taxpayer has been somehow prevented from meeting their tax obligations.
  • Situations that may warrant relief include:
    • Natural or human-made disasters (such as fires, floods, or civil disturbances) that prevented a taxpayer from filing their taxes or paying their tax debt on time
    • Serious illness, accident, or mental or emotional distress (such as the death of an immediate family member) that caused a taxpayer to miss a filing deadline or payment
    • Actions of the CRA (such as incorrect information being provided, errors in processing, or other delays) which led to a taxpayer not being able to meet their tax obligations on time.
  • The CRA may also consider reducing or eliminating interest charges in situations of severe financial hardship. This includes situations where a loss of employment occurred or situations where interest and penalty charges represent a significant portion of the payments. The CRA may also consider relief in situations where paying the accumulated interest would cause a prolonged inability to afford the basic necessities of life (food, shelter, etc.). In these instances, the CRA requires full financial disclosure from the taxpayer before deciding whether or not it will offer relief.

Reducing Interest and Penalties on CRA Tax Debt

In some cases, you may be able to have interest and penalty charges reduced or eliminated on your tax debt. However, this only applies in specific situations where a taxpayer was prevented from meeting their tax obligations due to circumstances beyond their control as well as in some situations of extreme financial hardship.

For instance, if a taxpayer could not file or pay their taxes on time due to natural or human-caused disasters, civil disturbances, serious illness or accident, or a death in the immediate family, the CRA may be willing to provide relief from interest or penalties. Penalties and interest may also be waived or cancelled in situations where processing delays, errors in CRA materials, or incorrect information prevented a taxpayer from meeting their tax obligations.

In situations of severe financial hardship, the CRA may also consider waiving or cancelling interest and penalties. This includes instances where interest charges represent a significant portion of the outstanding debt or situations where paying the accumulated interest would result in an inability to afford the basic necessities of life.

As you can see, situations where the CRA will consider relief are quite narrow and strict. You will need to provide proof if you wish to have the CRA consider your situation under one of the above relief scenarios. When combined with the fact that the agency will not accept less than it’s owed and that it is often quite strict with payment plans, it becomes obvious that paying off tax debt can be difficult. 

Is There an Easy Way to Get Rid of Tax Debt?

How to Pay Off Tax Debt Quickly

Nearly everyone in Canada needs to file income taxes. Some get refunds, but others end up owing tax debt. If you owe money to the Canada Revenue Agency (CRA), this can sometimes be a tough situation and it can be hard to pay what you owe. It becomes even more difficult if you have received a CRA reassessment.

When you initially submit your tax returns, you receive a Notice of Assessment that outlines your tax situation, including whether you owe tax debt or if you will receive a refund. However, the CRA is able to go back and review tax returns after this initial assessment. In some cases, the CRA does this year after you initially submitted your return. As a result, you could find out you owe tax debt from several years ago that you didn’t know about.

Paying off this tax debt can be difficult, not only because it’s unexpected, but also because the CRA charges compound daily interest dating back to when the debt was originally due. If the debt should have been due years ago, you’ll be faced with a lot of interest.

Since this is a difficult situation, many people find themselves wanting to know how to pay off tax debt quickly or if there’s an easy way to get rid of tax debt. Here are tips and suggestions that could help.

Taxpayer Relief Provisions

In certain situations, the CRA may be willing to reduce or even eliminate interest and penalty charges. However, this is only applicable in situations where taxpayers were prevented from meeting their tax obligations, including:

• Actions of the CRA, such as processing delays or incorrect information being provided, that caused a taxpayer to file late, file incorrectly, or miss a deadline
• Extraordinary circumstances, such as fires or floods, that prevented a taxpayer from making a payment when due, filing on time or complying with their tax obligations in other ways. Serious illnesses or situations of serious emotional or mental distress (such as the death of a close family member) can also be considered extraordinary circumstances
• Significant financial hardship, such as a job loss or an instance where paying interest and penalties would prevent a person from affording life necessities

The CRA may also offer relief in situations other than the ones listed here. You must apply to receive relief from the CRA. It is strongly recommended that you work with an experienced professional when applying to give yourself the best chance of success.

Objecting to a CRA Assessment

If you receive a CRA assessment or reassessment and do not agree with it, you are able to file an objection. This allows you to state that you disagree with the CRA’s view of your tax situation and provide proof to support your points. If the CRA accepts your objection, it will modify your assessment.

There is a formal process of filing a Notice of Objection. If you wish to object, working with a professional is very important. CRA processes are often confusing and complicated and working with a professional won’t just ensure that you follow the process correctly, but also that you have the best chance of success.

As mentioned, objecting to a tax debt requires proof. A trained professional can help you prepare your case to make it as strong as possible and ensure the documents and other concrete details to back up your points.