Paying off Your Taxes When You Are in Debt

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Tax season is just around the corner, which means that it’s a stressful time of year, especially for people who are struggling with debt and wondering how they’re going to file their taxes and whether they can afford the crucial payments.

The best thing that you can do to get ready for tax season is to do your research. Check how much you owed in years prior to getting a better idea of how much you will owe this year. See what tax breaks and deductions you can use to give yourself some extra relief and take a good look at your personal finances to see if you need more help with tackling these payments. A licensed insolvency trustee firm could be the next best step.

Find out how you can prepare for tax season, and what options you have when you can’t pay what you owe right away.

Taxes in Bankruptcy

When you look at the bankruptcy trends in Toronto and Ontario, you can see that personal bankruptcy filings are slowing down. This change is not because residents aren’t struggling with their finances and avoiding insolvency. The change is because more people are turning to consumer proposals as their first debt relief option. But, there are times when filing for personal bankruptcy may be your best strategy for debt relief.

The act of filing for bankruptcy lets your creditors and the Ontario courts know that you are insolvent (unable to pay your debts). The process involves settling your assets — although there are notable asset exemptions in Ontario that you should know about. Then, the funds from the settled assets will be disbursed among your creditors. After attending credit counselling sessions and completing legal requirements, you will be discharged, and your debts will be considered cleared.

Income tax debt can be included in your bankruptcy. One of the first things that the bankruptcy trustees at David Sklar & Associates will do for you is file a pre-bankruptcy tax return. Any tax owed between January 1st and the bankruptcy filing date will be included in that specific return, and then included in the bankruptcy.

Later in the process, your trustee will file a post-bankruptcy return. This return reports your income from the bankruptcy filing date to the end of that year. If there is tax owing, you must pay this tax. If you qualify for a refund with either one of these tax returns, it will be automatically sent to the Trustee to be put toward your bankruptcy and disbursed to creditors.

how to pay of taxes when you're in debt

Taxes: The Basics

Every year, citizens are expected to report their taxable income to the federal, provincial and territorial governments. The taxable income can be earned inside or outside of the country. It includes full-time/part-time work, self-generated income (like an online business), rental income, investments and pensions.

There are some forms of income that go untouched during the tax filing process. These are some examples of non-taxable income: allowances, inheritances, scholarships and gifts. So, don’t worry if you’ve received a sudden inheritance — it will not push you into a higher tax bracket.

Ontario residents file with the Canada Revenue Agency (CRA). The earliest that the CRA accepts electronic returns is February 24th, 2020. The deadline for filing your return and making your payments is April 30th, 2020. After that, you can still file and make payments, but you will face penalties and interest.

It’s important to know that there has been a recent change for people who are self-employed. Their deadline to file their return is June 15th, 2020 — although they still have to pay the taxes that they owe by April 30th.

You have several ways to file your return. The most popular way to do your taxes is online. Choose software options like TurboTax, SimpleTax, StudioTax or AdvTax. Or you can do it the old-fashioned way by filling out the paper return and then mailing it to the CRA. If you filed by paper last year, the CRA will automatically mail the forms to your address in February. If you didn’t, you can get the documents elsewhere:

  • Download them from the CRA website
  • Get them from the post office
  • Get them from Service Canada

How to Pay off Your Taxes When You Are in Debt

Get Ready

Ideally, if you’re worried about the entire process, you should give yourself lots of time to prepare. The last thing that you want to do is give yourself a tight deadline, rush and make mistakes.

Start planning now. Call up the CRA to ask them any questions that are bothering you. Look up your previous filings to see what you can expect to pay and receive. Do your research. Covering all of your bases will make the experience easier to handle.

Filing Your Taxes

Filing your taxes in a consumer proposal or bankruptcy can be overwhelming. You have to organize your proof of income, receipts of expenses and other important documents. You have to calculate large numbers, hoping that you don’t make the smallest error. You have to comb through the categories to make sure you’re filling out every piece of vital information.

And it doesn’t help that you have to cope with the looming anxiety that your return could set off alarm bells at the CRA, and they could file for a tax audit.

Hire a Professional

To take some of the pressure off of yourself, you can go to a professional for help. Going to an accountant that specializes in income tax will be extremely beneficial for anyone who doesn’t have a straightforward filing process. For instance, someone who is self-employed or who has multiple streams of income is an excellent candidate. They will be trained to handle these types of intricate situations.

The problem with hiring an accountant is that it costs money. You could argue that the money spent will be worth the relief you receive, and possibly the money that you save from having an error-free filing experience. But, the average person that’s on a tight budget and juggling a high debt load won’t want to pay for the service. They would rather save their dollars and take their chances on their own. 

Go to a Clinic

If you need professional help but can’t afford the fees, there is still a savvy solution out there: free income tax clinics. They are all over the Greater Toronto Area throughout March and April. The tax clinics are designed to assist citizens living with modest incomes through their filing without charging them any fees. They’re often held at Toronto Public Library branches and local community centers. Search to see which ones are close to you and sign up before the deadline.

Don’t Miss the Deadline

One thing that you should never do is skip filing — even if you’re positive that you can’t afford to make any payments. The CRA gives out failure-to-file penalties and failure-to-pay penalties to people who ignore the deadlines. The failure-to-file penalty is 5% of your balance. Another 1% is added for every additional month that it’s late (up to 12 months). So, you could risk a 17% penalty on the balance.

At the very least, you can save yourself the money and trouble by filing. There are ways to resolve the payment issues later on.

Learn About Deductions and Tax Breaks

Research potential deductions and credits that relate to your situation. They could give you some relief, making your payments an easier burden to carry. For instance, Ontario residents should learn about the LIFT Credit and the CARE credit as soon as possible.

Low-Income Individuals and Families Tax (LIFT) Credit:

The LIFT credit is supposed to help full-time workers making minimum wage. It offers up to $850 of relief for individuals, and it offers up to $1,700 of relief for couples.

Childcare Access and Relief from Expenses (CARE) Credit:

The CARE credit is supposed to help families with children up to sixteen years old and a maximum income of $150,000. It offers families up to $6,000 in relief for children seven years old and younger. It offers up to $3,750 for children between the age of seven and sixteen.

There are deductions and credits out there for education, disability and even climate action. Do your research ahead of time to see what options you qualify for — you don’t want to miss out on anything.

Know Your Options

If you can’t afford to make your tax payments in full, you don’t have to panic. You have some options that make the obligation much more manageable. You don’t have to ignore the deadlines, accumulate interest and collect penalties. Read ahead to find out what you can do.

Contact the CRA

You’ve finished the filing and realize that you can’t make the payments that you owe. Maybe the total is too high to manage at once. In that case, you can contact the Canada Revenue Agency to discuss a payment plan, where you repay them in installments over the course of several months.

The repayment period will be no longer than a year — but an extra 12 months could be just what you need. The only issue with this is that you may still be charged interest for failing to pay on time.

If that solution is still too overwhelming for you, you can see if you qualify for Taxpayer Relief Provisions (also called Fairness Provisions). The CRA will sometimes make exceptions for taxpayers who can’t make their payments in-full or on-time due to emergency circumstances, including the inability to pay or financial hardship.

You will have to prove that you would not be able to make repayments with interest and penalties, or that meeting these qualifications would affect your livelihood and well-being. For instance, you would have to choose between money for basic necessities (food, shelter) or making the repayments. In this case, the CRA may waive the penalties and interest to make the situation easier on you.

Go to a Licensed Insolvency Trustee

There are times when the CRA’s repayment plan may not be enough relief for you. Maybe you are too deep in debt to manage any of the payments, even when the interest and penalties have been waived. Maybe you have a backlog of payments from previous years of federal/provincial income tax. You need more help than that.

If this is the case, you should think about going to see a licensed insolvency trustee (formerly known as a bankruptcy trustee) and asking about consumer proposals in Ontario during your consultation.

Consider a Debt Relief Plan

Consumer Proposals:

A consumer proposal is a legally binding agreement made between a debtor and their unsecured creditors that effectively lowers the total debt sum. The debt can be for credit cards, unpaid utility bills, and of course, payments owed to the Canada Revenue Agency. The proposal gives you a maximum of 5 years to repay that lowered total. If you complete the repayment plan, your debts with these creditors are officially cleared.

Other than lowering the debt total, a consumer proposal stops things that can make your repayment more challenging and stressful. Once the agreement is signed, you no longer accumulate interest from the creditors in the proposal. They are also supposed to stop any contact with you regarding collection, and they must stop any legal actions against you. All you have to focus on is your straightforward payment plan, along with your everyday expenses.

A consumer proposal is for individuals that owe up to $250,000. This does not include the mortgage on their primary residence. But, what if you owe more than that? Then, you can ask a licensed insolvency trustee about filing for a division 1 Proposal to deal with your debt total.

Division 1 Proposal:

A Division 1 Proposal is very similar to a consumer proposal. It’s a legally binding agreement between a debtor and their creditors in order to lower the debt amount. There are a couple of key differences between the two relief methods. First, a Division 1 Proposal is meant for businesses or individuals that owe more than $250,000, not including the mortgage on their primary residence. Secondly, the repayment plan does not have a set time limit. It can be longer than five years.

These options can be very useful when you’re swamped by unpaid taxes and other types of debt. They won’t erase the problem, but they can make it much more manageable. With the agreement, you can steadily chip away at the debt total and eventually get the clean slate you were hoping for.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt, call us at 1-844-962-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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