Solutions for Tax Debt Relief
When faced with income tax or HST debt, your first instinct might be to run and hide, hoping that if you ignore it, it will disappear. But while many people might choose to ignore their taxes, this is the worst thing you can do if you owe money to CRA.
Due to significant penalties and interest CRA can charge on outstanding tax arrears and debts, your tax debt will only get bigger, and CRA will eventually contact you, and may then garnish your wages and bank account, or lien your property to collect the tax that is owed. So, do yourself a huge favour and file your income tax and HST returns, and then begin to figure out how you will pay CRA.
No matter the size of your income tax or HST debt, if you can’t afford to pay the debt off, there are solutions available to help you.
How Common Is Tax Debt?
Income tax and HST debts owed to CRA are very, very common. There are many reasons for this: non-existent or inaccurate accounting records; a lack of understanding of tax rules and CRA’s processes; CRA audits and its ready disallowance of expenses for a multitude of reasons; insufficient tax installments; substantial CRA penalties and interest which often exceed the taxes owed; and, the inability to pay CRA due to other higher priority life events.
For those of us who are self-employed and set money aside throughout the year, we may not have saved enough due to the very complex CRA installment rules that must be complied with. How can we know how much to pay CRA during the year when we don’t even know how much we will earn? Unexpected expenses (illness, children or spouse needing assistance, a new furnace or roof repair) can cause us to dip into our CRA savings, and we can no longer afford to pay the income tax or HST that is owed.
Paying Taxes When You’re Struggling with Debt
As we’ve noted, you can’t ignore tax debts. If you are struggling to pay your debts, and/or you also have a large tax bill, we recommend that you consult us to get you started on a solution. Initial consultations are free of charge. You will meet with a Licensed Insolvency Trustee, who is also an experienced CPA.
What If I Can’t Pay My Taxes?
If you can’t afford to pay your taxes, there are options available through CRA. But keep in mind that you will need to file all outstanding income tax and HST returns before you can apply for any of these options. CRA will require full disclosure of your finances, and proof of your inability to pay your taxes in full. We can assist you with completing and filing outstanding returns and speaking to CRA on your behalf.
These are your options. We will thoroughly explain and guide you through the option that is best for you.
If you can’t pay your income taxes or HST in full when they are due, you can set up a monthly payment arrangement with CRA. A payment arrangement allows you to make smaller monthly payments over an agreed-upon period-of-time until you have paid off your tax debt and any accrued interest in full. CRA is flexible to a point. A year is usually the maximum length for time CRA will give you.
When setting up a payment arrangement, you can ask the CRA, “How much tax will I pay each month for 12 months?” And see if that’s an affordable option for you.
For example, if you owe $2,000 and you want to pay off your tax debt in 12 months, you can make a payment arrangement to pay $166.67 per month plus interest. If the interest charged is 6%, then you will pay a total of $176.67 per month for 12 months.
If you can’t pay your taxes due to events that were beyond your control, you might qualify for Taxpayer Relief. With an approved application for Taxpayer Relief, CRA will waive some or all penalties and interest on the taxes owing. CRA will not compromise the income tax or HST tax owed. CRA takes the following into account in assessing the application:
- Financial hardship
- Loss of employment
- Serious physical or mental illness
- Error on behalf of the CRA
- Natural disasters
We have significant experience in working with CRA and the Taxpayer Relief program.
If neither of these options works for you, and you still can’t pay your tax debt, even with payment arrangements or Taxpayer Relief, read on to learn more about alternative tax debt solutions.
Dealing With the CRA
The best thing you can do for yourself when dealing with the CRA is to file all outstanding tax returns. Even if you know you will owe money, you are better off filing your taxes (and on time preferably) instead of avoiding this important obligation.
Otherwise, you will accrue further penalties on tax returns that are filed late. And CRA will withhold tax credits and benefits. Also, if you don’t file your taxes, CRA can make an arbitrary assessment of what you owe in taxes, which is an estimate based on your past income history.
If you don’t dispute this arbitrary assessment within a required timeframe, CRA can start collecting this estimated amount owing.
CRA can garnish your paycheques without a court application until the amount owing is paid in full. To do this, CRA serves your employer with a “Requirement to Pay” notice, and part of your paycheque will then start going to CRA.
Debt Collection Actions
CRA can also garnish your bank accounts, freeze your bank accounts, seize your assets, and register liens against your home and property.
Any of these actions will cause severe financial hardship. So, you should address your tax return filings and find a tax debt solution as soon as possible, instead of ignoring your tax debt.
Does CRA Forgive Debt?
The CRA does not forgive debt. While CRA may waive penalties and interest through Taxpayer Relief, it cannot forgive or reduce the principal amount owed. Otherwise, CRA would be setting a precedent that would force it to accept lower amounts from everyone.
The only way you can reduce or eliminate the tax principal, and interest and penalties owed, is by working with a Licensed Insolvency Trustee. A Licensed Insolvency Trustee, such as our firm, can provide two tax debt solutions.
Tax Debt Solutions
If you cannot pay your income or HST tax debts, even with the penalties and interest waived, you can negotiate the amount of tax you owe to CRA by filing a consumer proposal with the assistance of a Licensed Insolvency Trustee (LIT). A LIT will assess your financial situation and offer on your behalf, to CRA and your other creditors, a payment plan that is affordable and reasonable for you, CRA and your other unsecured creditors.
With a consumer proposal, you can settle your tax debt for much less than the full assessed amount, including principal and interest amounts. The reduced amount the CRA accepts will depend on your circumstances, income, and assets.
A consumer proposal stops CRA and other creditors’ collection actions, allows you to make affordable monthly payments over an extended period-of-time, freezes the interest accumulating on your tax debt, and will significantly reduce your income tax, HST and other unsecured debts.
If you can’t afford a consumer proposal payment plan, a LIT will review your case and help you decide if filing for bankruptcy is your best option. As with a consumer proposal, bankruptcy also stops CRA and other unsecured creditor collection actions and eliminates all, or substantially all, unsecured debt that is owed. Bankruptcy will be less costly and will take less time to complete than a consumer proposal.
Taxes are, unfortunately, unavoidable. But, if you can’t afford to pay your income tax or HST, there are options available to help you. Instead of ignoring your taxes, find the best tax payment solution for your situation. Once you get a handle on your taxes, we are confident that you’ll experience a dramatic improvement in your health and happiness.
Baker Tilly Ottawa Ltd., until its recent name change, Collins Barrow Brown Inc., is a Licensed Insolvency Trustee servicing Ottawa, Gatineau and Eastern Ontario since 2002. Its licensed professionals have over 100 years of combined experience in assisting individuals in financial difficulty. They have overseen thousands of successful consumer proposals and bankruptcies. Their passion – their mission – is your health and well-being! Start your journey today with a free initial consultation!