Tips for Paying Your Taxes When You’re Struggling With Debt

Canadian Tax Tips

Table of Contents

Tax season can be a stressful time of year, especially if you discover that you owe the Canada Revenue Agency (CRA) money and can’t afford to pay taxes. But it’s even worse if you’re grappling with other debts, such as credit cards and lines of credit. You may wonder, or even dread, how you can simultaneously afford the payments while dealing with your tax bill.

But don’t panic or despair if you can’t afford to pay your taxes by the deadline—there are things you can do to make your CRA debt obligations more manageable and affordable. In this guide, we’ll provide some helpful tips for paying your taxes when overwhelmed by debt.

Tip #1: Get ready early

If you anticipate owing taxes to the CRA, start preparing to deal with them as early as possible—don’t wait until the payment deadline. If you’re in a rush, you could make costly errors on your tax return, leading to hefty penalties, interest fees, and even a CRA audit.

First, gather all the tax slips and receipts you need to report your income and deductions. If you’re self-employed, prepare your financial statements, so you know your total revenue and expenses for the year.

Next, look up your previous tax filings to understand what you can expect to pay. If you paid taxes in recent years, there’s a good chance you’ll have to do so again this year unless your financial situation has changed drastically. 

You can also estimate your tax liability by using an online income tax calculator. Knowing how much you owe to the CRA from the start will give you more time to plan for how to save up the money needed.

Finally, research any tax topics that are causing you to lose sleep. If you have any questions or concerns about your tax situation, now’s the time to call up the CRA for help. 

Tip #2: File your tax return on time

One thing that you should never do is skip filing your tax return — even if you’re positive that you can’t afford to pay the CRA. There are three crucial reasons to submit your tax return by the deadline: 

  1. Avoid late-filing penalties and other legal consequences. If you owe money to the CRA and file late, it will charge a 5% penalty on your balance and an extra 1% for each month you file past the due date. In addition, failing to file your taxes can be deemed a form of tax evasion, a criminal offence punishable by fines, wage garnishments, and even prison time.
  2. Work out a payment arrangement with the CRA. If all your tax filings are up to date, the CRA will be more willing to help you set up an alternative payment arrangement for your tax bill. We’ll delve more into this later but understand that having the opportunity to negotiate a payment schedule is valuable.
  3. Know how much taxes you owe. Once you complete your tax return, you’ll know exactly how much you need to pay the CRA. Otherwise, you’re just guessing and risk falling short on your payment, which means you’ll get hit with more interest charges and penalties.
  4. Qualify for government benefits. You must file your tax return to receive certain government benefits, such as the Ontario Trillium Benefit. Remember that the CRA will withhold your entitlements if you have unpaid taxes. However, it will apply the funds against your balance, so you’ll have less tax to pay overall.

Tip #3. Go to a tax clinic to get your tax return filed

Does the thought of completing and filing your tax return yourself fill you with anxiety? If so, consider offloading the work to a tax accountant.

However, the problem with hiring a professional accountant is the cost. If you’re on a tight budget and have a high debt load, paying for this service may not be feasible.

Luckily, there’s a savvy solution available if you need professional help but cannot afford the fees: free income tax clinics. A tax clinic is where volunteers file tax returns for eligible individuals (usually those with low incomes) free of charge. Throughout March and April, you can find them scattered across various locations, such as public libraries and local community centres. Search to see which ones are close to you and visit them before they close their operations.

Tip #4. Maximize your tax deductions, credit, and benefits

Keeping your tax liability as low as possible is crucial for minimizing the financial strain on your household. When doing your taxes, ensure you claim every deduction and credit potential

Here are many valuable federal deductions and credits that people frequently overlook. Here are some examples:

  • Home office expenses
  • Moving costs
  • Medical expenses for self, spouse, and dependents
  • Interest expenses and carrying charges related to earning income from investments
  • Childcare costs
  • Interest paid on student loans
  • Tuition transferred from a child or grandchild
  • Disability tax credit
  • Charitable and political contributions
  • Home buyer’s amount

The CRA provides a detailed list of credits and eligible deductions. Do your research to see what’s available and what you may have missed. Remember: every dollar saved counts when you’re struggling with debt and owe taxes.

In addition, make sure to take advantage of provincial tax benefits. For example, if you live in Ontario, you may qualify for the following.

Tip #5. Figure out ways to increase your income or cut down on expenses

Once you’ve submitted your tax return to the CRA, it’s time to brainstorm ideas for paying off your outstanding income tax debt.

Review your budget and see if there are areas that could use some trimming. What costs can you reduce to free up more cash to pay your taxes? Are there any discretionary expenses you can sacrifice, at least temporarily?

Recalibrating your spending can help, but it may not be sufficient—you may need to find ways to boost your income.

One way to earn extra money quickly is by taking on gig work, which offers flexibility and variety. Other ideas worth exploring are renting out a spare bedroom in your home, selling unwanted items online, or asking your employer for overtime work.

Tip #6: Make a partial payment or pay in installments to the CRA

If you can’t afford to pay your taxes in a lump sum by the deadline, consider making payment arrangements with the CRA. Provided your tax filings are up to date, and you can prove you’ve taken reasonable measures to pay off your debt, the CRA can help you figure out a solution based on your financial circumstances.

To set up a customized payment plan, contact the CRA’s automated TeleArrangement service. A collection officer will help you craft a payment schedule that fits your budget. You have two options:

  1. Contribute a partial payment. By making a partial payment upfront, you can minimize your interest charges. You’re still obligated to repay the remaining balance in full.
  2. Pay in installments. Under this option, you repay your balance over time through monthly installments. The maximum repayment period is only one year, but an extra 12 months could be just what you need to deal with your taxes

Tip #7: Request taxpayer relief from the CRA

If a tailored payment plan doesn’t give you enough breathing room, you can see if you qualify for the CRA’s Taxpayer Relief Provision (also called the Fairness Provision). Under this program, the CRA may waive interest charges and penalties on your unpaid balance.

You’ll have to prove that you cannot make payments with interest and penalties or that meeting these qualifications would affect your livelihood and well-being. For instance, you must choose between spending money on basic necessities (food, shelter, etc.) or taxes. In this case, the CRA may agree to eliminate penalties and interest charges to help you meet your payment obligations.

Tip #8: Take out a debt consolidation loan

Taking on more debt when you’re already drowning in debt is inadvisable. However, a debt consolidation loan is an exception because it allows you to combine multiple debts, including taxes, into a single loan. These types of loans also offer lower interest rates, making them more affordable overall compared to credit cards and lines of credit. 

That being said, qualifying for a debt consolidation loan can be difficult, if not impossible. One of the eligibility requirements is a good credit score, which you may not possess if you have a history of late payments and carry a high debt load. In that case, lenders may only approve your application if you agree to a high-interest rate, which defeats the entire purpose of getting a debt consolidation loan in the first place.

Tip #9: File a consumer proposal

If your finances are in dire straits and conventional debt management solutions are not enough to help you pay your taxes, filing a consumer proposal may be the solution you need

A consumer proposal is a legally binding agreement between you and your unsecured creditors (including the CRA) to pay less than you owe. In other words, a portion of your balance, usually a considerable amount, is forgiven. The remaining debts are consolidated, with the balance payable over five years. 

In Canada, only a Licensed Insolvency Trustee can administer a consumer proposal, and it’s available for qualified individuals who owe up to $250,000 in debts excluding mortgages on a 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, a debt relief program geared toward individuals and businesses with extensive debt obligations.

The bottom line on paying taxes when you’re struggling with debt

Finding out you owe taxes to the CRA when you’re barely keeping up with other loan payments can be disheartening. You feel like you are making progress, but then another debt appears out of nowhere. However, by following the tips outlined in this article, you can better manage your taxes while staying committed to your other debt obligations.

Make a plan to resolve your tax debt as early as possible. Estimate your tax bill ahead of time, file your return by the deadline, and claim every deduction and credit you’re legally entitled to. Then, focus on saving enough money to pay your balance and working with the CRA to create a realistic payment plan.

If all this sounds a bit overwhelming, there’s no shame in speaking with an expert to help you figure out the best way forward. At David Sklar & Associates, we’ve been helping Ontario residents fix their debt woes for over 20 years – we can help you, too! Contact us today to book a free, no-obligation consultation.

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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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