Owe income tax in Canada and can’t pay your taxes?

Tax season can be a stressful time for many Canadians, especially if you find yourself facing an income tax bill that you can’t afford to pay. The Canada Revenue Agency (CRA) has strict deadlines and rules, and falling behind can result in interest and penalties that make the situation even more daunting.

However, there is hope. By understanding your options and seeking the right assistance, you can manage your tax debt. What happens if you owe income tax in Canada and can’t pay your taxes? Do you qualify for tax payer relief from the CRA?

Understanding Your Tax Obligations

The first step in managing your personal taxes is understanding how your income taxes are calculated. Income tax in Canada is based on your earnings, and different income brackets are taxed at different rates. You can prepare your income taxes yourself or you can hire a bookkeeper, tax preparation service, or CPA firm to help you.

A good tax preparation service can help you understand your obligations and ensure that you are filing correctly. If your eyes are starting to glass over at this point, then you should strongly consider having a bookkeeper or accountant help you.

The CRA tax filing deadline is typically:

• April 30th for most individuals,
• June 15th for self-employed individuals, although any taxes owed are still due by April 30th. It’s crucial to meet these deadlines to avoid late filing penalties and interest on any amount owing.

Pro tip: we recommend filing your taxes on time even if you can’t pay them. At least this way you will avoid a late filing penalty.

If you are self employed you can also be referred to as a sole proprietor. No matter what label you use, if there is no tax withheld from your paycheque, then you have an obligation to remit current year taxes via instalment payments.

Instalment Payments – Paying for This Year’s Taxes

For self employed people, CRA wants you to pay your current year’s taxes either every three months, which is referred to as quarterly, or every month. If you are disciplined enough to do this it will prevent you from having a large amount of tax owing at the end of the year.

There are several ways to calculate how much you should be remitting in instalment payments. The easiest way is to look at your prior year income tax return and divide the total payable by 12.

If you don’t remit appropriate income tax via instalments, or don’t send anything at all, then CRA will start to charge you interest and penalties. Yikes! Another good reason to have a good bookkeeper on speed dial.

People who are working as employees usually do not have to worry about instalment payments because their employer withholds income tax from their paycheque.

What Happens If You Don’t Pay?

Ignoring your tax debt can lead to serious consequences. The CRA has the authority to take collections action if you do not make arrangements to pay and they wield a heavy hammer. Their collection actions can include:

1. Garnishing your wages. We have seen some people have 100% of their wages garnished! CRA does not need a Court order to do this and it can happen very quickly.
2. Freezing your bank accounts and taking all of the funds in it.
3. Placing a lien on your property which is just like having a mortgage on it. However, it is quite rare for them to force the sale. Rather, they wait until you want to sell or change the title somehow.

It’s crucial to address your tax debt promptly to avoid these drastic collection measures.

Before this heartache unfolds, CRA will contact you via letter and phone to advise you of the debt and ask you to pay.

Pro tip: be careful of scams. If you get contacted from CRA, you can always arrange to call into their general enquiries line to confirm it is actually CRA calling and not a scam artist.

What to Do If You Can’t Pay Your Taxes

If you can’t afford your tax bill, it’s important not to ignore the situation. The CRA offers several options to help taxpayers who are struggling, including payment arrangements and taxpayer relief provisions.

1.    Payment Arrangements

If you owe taxes but cannot pay the full amount by the due date, the CRA allows you to make payment arrangements. This means you can pay your debt in full over time through monthly payments. To set up a payment arrangement, you can contact the CRA directly. They will assess your financial situation and work with you to create a manageable payment plan.

You will need to carefully consider if you are making any headway on your overall tax bill. We have seen situations where a person is making an honest effort via monthly payments but because of the ongoing penalties and interest, the overall tax debt is not falling. In addition, the payment going towards the arrears often means the current year’s instalment payments are not being met.

2.    Taxpayer Relief

The CRA also offers taxpayer relief provisions, which can help reduce the amount of interest and penalties on your tax debt. You may be eligible for taxpayer relief if you are experiencing financial hardship due to circumstances beyond your control. To apply for relief, you need to submit a request to the CRA explaining your situation and providing any supporting documentation.

In our experience, this program provides a false hope and relief is not often granted. Circumstances where we have seen it be somewhat effective include a death in the family which caused a missed filing deadline and delayed filing due to a natural disaster.

3.    Seeking Professional Help

Dealing with tax debt can be overwhelming, but you don’t have to face it alone. The following professionals can be of assistance:

• A Chartered Professional Accountant (CPA) can be an invaluable source of assistance. There is the possibility that your tax returns have been filed incorrectly, or, if you have not filed in several years, arbitrarily assessed by CRA resulting in back taxes. An arbitrary assessment means that CRA has guessed at the result. A CPA can help you file an adjustment to a prior year tax return, file old outstanding returns, or file a notice of objection if it appears CRA has made a glaring error.
• A Licensed Insolvency Trustee (LIT) is typically a CPA that has been licensed by the Federal Government to help people rearrange their finances. This includes income tax debt! A LIT is the only professional in Canada that can file a Consumer Proposal or a Bankruptcy Both of these actions create a powerful stay in proceedings which prevents creditors, including the income tax department, from collecting.

Recently, Consumer Proposals have become quite popular. A Proposal is the only way that CRA can agree to take less than the full amount owing, usually payable over time with no interest, as full satisfaction for the entire debt.

Hope for the Future

Facing a tax debt can be stressful, but it’s important to remember that there are options available to help you manage your situation. By taking proactive steps and seeking the right assistance, you can address your tax debt and work towards financial stability.

There is a path forward and better days are ahead. With the right approach, you can overcome your tax challenges and achieve financial peace of mind.

Conclusion

Owing taxes in Canada doesn’t have to be a hopeless situation. Don’t let the fear of an unaffordable tax bill paralyze you.  If you are unable to set up a manageable payment plan directly with CRA, contact a Licensed Insolvency Trustee ( that’s us) in order to discuss some practical options for moving forward.

Even if you currently have a CRA garnish on your wages, a Consumer Proposal or a Bankruptcy filing can have this garnish removed and provide you with financial relief and a fresh start.

Please contact one of our convenient offices to set up a free initial consultation.