Tax season is approaching, and you may already know that you owe the Canada Revenue Agency some money.
At David Sklar & Associates, we offer debt relief and credit counselling services to help you better deal with your finances.
If you’re anxious about achieving your payment goal by the due date, read these helpful tips for paying your taxes and taking care of debts to the CRA:
Tip 1: Always File
The deadline for filing your federal income tax is usually April 30th. However, COVID-19 changed things in 2020. The government announced extensions for filing 2019 income tax returns because of the pandemic. Individuals had until June 1st, 2020, to file. People who are self-employed had until June 15th, 2020. These deadlines have come and gone, but it’s still not too late if you haven’t filed.
It’s better to file late than never. For one, skipping the responsibility doesn’t mean that you don’t owe the Canada Revenue Agency, and ignoring it can make addressing your taxes more challenging (and expensive) in the future. It’s better to pull off the bandage now.
For the average year, filing your taxes late results in a late-filing penalty. The late-filing penalty is 5% of your balance owing. That amount increases by 1% for each month past the deadline — this goes up to a maximum of 12 months. And if you’ve already been charged a late-filing penalty in the previous 3 years, that penalty balloons to 10% of your balance owing, plus 2% for each month the return is late for a maximum of 20 months.
The good news is that this year the CRA has promised not to charge late penalties and interest as long as the return is filed and payments are made by September 1st, 2020. So, you still have time to avoid paying extra.
It’s also important to remember that the CRA needs your 2019 return so that they can process your benefits and tax credits properly. If you delay too long, they will have to base your benefits and credits off of your 2018 information. You could be keeping money out of your own pockets.
So, the number one rule is to always file your taxes — even if you don’t think you can make the payments. That’s a separate goal that you can tackle later.
How to File:
Filing your taxes can be intimidating. Maybe you’ve never done it before. Maybe you’re a freelancer or gig-worker, and you know that filling out your return is going to be more complicated. Whatever the reason, you can still find help so that you don’t have to miss any more deadlines.
Through an Accountant
If you have room in your budget, go to an accountant that specializes in income tax. They will make sure that your return is filed properly and that you won’t forget any tax credits, breaks or benefits. No stone will be left unturned. Due to COVID-19, many accountants are offering online services to comply with social distancing measures. All you have to do is make sure you have all of your important documents handy.
Through a Tax Clinic
If you can’t afford an accountant, there are free tax clinics that can help you prepare your return. In the average year, these tax clinics would be available at public libraries and community centres during the spring. But, because of COVID-19, these clinics have moved online and are staying open past the June 1st deadline to support Canadians. So, you can file without breaking your budget.
If you’re at a loss of what to do, don’t be afraid to ask for help. You can do this!
Tip #2. Get Organized
Before you start filing, you’re going to need to have all of your documents in order. You will want to have all of your Tax Slips (T-Slips). Your employer should have sent you a T4 by the end of February this year. If you’ve lost or misplaced yours, contact your employer to send you another one. They should have a digital copy.
Learn about the tax credits and benefits that you are eligible for. You could qualify for opportunities like the Canada Workers Benefit, the Climate Action Incentive or the Medical Expense Tax Credit. Do some research ahead of time.
Keep all of your important receipts in one place. Paper receipts should be neatly arranged in an envelope or folder. Digital receipts should be collected in a computer folder. Print them and then add them with your other paper receipts.
Having your papers in order makes it easier to file your taxes, fill in the correct information and make accurate calculations. It is also a good precaution in case you ever get audited. You will have all of the documents that you used to file your return ready for the auditor.
Tip #3. Budget for Your Payments
After you’ve filed, you need to start the next step: planning for payments. The due date for 2019 tax payments is September 1st, 2020. Outstanding payments after that deadline will begin to accrue interest. So, try your best to get your payments in by that date.
If you don’t have enough savings to cover your tax payments at the moment, you should put together a thorough budget to use from now until September. You can download a budgeting app on your computer or phone and fill in the information. Or, you can fill out your budget on a digital spreadsheet. You can also find an easy-to-use budget form on our website.
Start by calculating your current income. Then, subtract your fixed costs (rent, mortgage, insurance) and variable costs (groceries, entertainment, gas). See how much is leftover. Is that enough to cover what you owe to the CRA? If not, you need to make some changes to your variable costs.
These are some ideas that could lower your variable costs and boost your budget:
- Order less takeout/fast food and prepare more meals at home
- Buy generic groceries instead of name brands
- Skip rideshare apps in favour of walking, cycling or riding public transportation
- Cancel subscriptions and memberships that you aren’t using
- Opt for free or cheap entertainment options (reading library books, streaming movies on a service you already subscribe to)
- Call service providers to see if they can give you a better deal
You can find more money-saving tips on our website. Click the “Living Debt-Free” section of our blog to find useful articles like “How to Go Grocery Shopping When You Are on a Budget” and “Holiday Spending Tips to Stay Out of Debt.” There are lots of small ways that you can improve your saving and spending so that you can reach your financial goals.
Tip #4. Recognize When You Can’t Pay
Sometimes, building a strong budget isn’t enough. You have a sinking feeling when you think about the September 1st deadline. You know for a fact that you won’t be able to pay off what you owe in time. Recognizing when you’re in over your head is half the battle.
The first thing that you should do is contact the CRA. You could qualify for a different payment arrangement or Taxpayer Relief Provisions — this could mean a payment extension, the removal of interest, the removal of penalties, the lowering of payments, etc. The relief provisions are in place to make payments more manageable for people who are really struggling. You may have to prove that you can’t afford to pay them. Due to COVID-19, they are likely to be more understanding about financial insecurity and hardship.
The second thing that you should do is see a licensed insolvency trustee. The professionals at David Sklar & Associates can help you find ways to afford to make your payments to the CRA, even if you’re going to miss the initial deadline. Don’t wait too long to book your consultation. The earlier that you can address this problem, the better.
If you’re a little behind on your payments and you don’t owe a lot, you can sign up for credit counselling services to break any financial habits that are sabotaging your savings goals. These sessions will give you the tools to build a better budget, use your credit responsibly and make smart, savvy decisions with your money. This service won’t be a short-term band-aid for your financial issues. You can draw on these important lessons for the rest of your life.
Now, paying off a large sum or paying off taxes while in debt will be much more challenging and will require more serious intervention. You should consider filing for a consumer proposal. A consumer proposal is a legally binding agreement between a debtor and their creditors (this would include the CRA). The proposal is asking for the total debt amount to lowered and for collection actions to stop so that they can feasibly manage their repayments.
With a consumer proposal, you can eventually clear your debts and avoid filing for personal bankruptcy. However, that debt relief option is still available if your creditors reject the terms of your consumer proposal. Click here to see what your CRA debt options are if you do end up filing for bankruptcy.
Why It’s Important to Repay the CRA:
The biggest problem with dealing with income tax debt isn’t the accruing interest or the growing list of penalties or the knowledge that you will have to repeat the process in a year. The biggest problem that you’ll have as a debtor is the CRA. The CRA has far more authority than your average creditor. Their collection activities can be a lot more aggressive than any cell phone provider, bank or money lender.
Several sections of the tax acts give the CRA the authority to collect owed payments through your bank. If they are tired of waiting for you to send funds, they can send a Third-Party Requirement to Pay letter to your bank. Upon receiving this letter, your bank is legally bound to send the CRA the requested sum of the money directly from your bank accounts. If you don’t have enough in your accounts to cover the balance, then the bank will still be bound to forward any future deposits to the CRA.
Since the CRA is a government agency, they do not have to jump through hoops in order to collect what they’re owed. They can freeze bank accounts, garnish wages and more without resistance from banks and other financial authorities. Making your payments should be a top priority to avoid these severe collection activities.
#4. Be Prepared for Next Year
Taxes come up every single year, so don’t leave your 2020 income taxes until the last minute. Being prepared will lower your chances of collecting late-filing penalties, late payment penalties and interest. You can file, pay your dues and take the weight of that responsibility off of your shoulders.
Start by organizing your receipts and essential documents. Keep digital copies just in case you lose or damage the paper copies. Look up benefits, tax breaks and credits that you are eligible for. These will be updated over the upcoming months.
And, if you have applied for the Canada Emergency Response Benefit after losing your job or work hours because of COVID-19, you need to work to set aside some funds for 2021. What many applicants may not realize is that your CERB payments are taxable income. You can read more about this in our blog post, “The Drawback of the Government’s COVID-19 Financial Help.”
David Sklar & Associates:
Residents of the Greater Toronto Area have had their lives turned upside-down by the pandemic of COVID-19. Here at David Sklar & Associates, we understand that many residents have been thrown into financial instability because of this health crisis and are concerned about what to do next.
If you need financial help, we are still here for you. We offer over-the-phone consultations and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.
Filing and paying your income taxes can feel like an intimidating and sometimes overwhelming responsibility. It doesn’t have to be. And if this article isn’t enough to push you to accomplish this goal, you can always get a professional to guide you to it, whether it’s an accountant to help you file or a licensed insolvency trustee to help you pay. You don’t have to do it alone.