Tax Debt Settlement and The Canada Revenue Agency

Young couple dealing with a surprise tax bill

Finding out that you owe the Canada Revenue Agency back taxes can come as a shock, but it happens more often than you might think.

It’s not just business people who wind up owing the government taxes. It can happen to just about anyone, and as anyone who has received a CRA collection letter for CERB repayment can attest, the often-confusing rollout of pandemic supports has made it more common to owe back taxes than ever before.

If you’re self-employed and pay your own income tax and HST, work multiple jobs, collected pandemic supports such as CERB, or withdrew money from an RRSP or pension, you could wind up owing taxes for the year.

When you’re unable to pay those taxes, you can find yourself in a difficult position. While it’s never a good feeling when you can’t meet your debt obligations on time, the CRA has extensive collection powers that can quickly make your financial position even worse.

You need a plan for dealing with the money you owe to the CRA. If you’re worried you can’t afford to pay back the taxes you owe, book a consultation with David Sklar & Associates to speak with a Licensed Insolvency Trustee. They’ll learn more about your financial situation to help you find a solution to your debts. They will walk you through your options for Canadian income tax debt help and give you the information you need to determine the best way forward.

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Paying Your CRA Debt Settlement in Installments

When you owe the Canada Revenue Agency, they expect you to pay in full by the deadline for tax payments. In 2022, the deadline to pay your taxes is April 30. But if an amount owing caught you by surprise and you didn’t prepare your finances, you can find yourself unable to pay.

The best course of action is to act immediately. Delaying can quickly worsen your financial situation, as the CRA has far-reaching collection abilities.

Instead, you may be able to agree to CRA settlement payments. While the CRA typically expects you to pay in full, you may be able to negotiate a CRA debt settlement in which you pay off the amount owing in installments. CRA settlement payments will not reduce the total amount you have to pay, and you will still face late penalties and interest.

The benefit of pursuing CRA debt settlement in this way is that the CRA will not pursue tougher collection actions against you, which can include withholding GST tax credits, child tax credits, and other benefits or refunds owed to you by other government agencies, garnishing your wages, and even freezing your bank account.

When the CRA takes more aggressive collection actions, you can wind up in a position where you don’t have the money to pay your rent, mortgage, car payments, and other essential bills. It can initiate a cascading set of further financial problems. Even if you don’t get a reduction in the amount you owe or relief from penalties, CRA debt settlement prevents worse from happening.

In order to arrange CRA settlement payments, you will have to contact the CRA directly. Next, you will have to explain the circumstances and why you need an extension. You will also have to show your income and an estimate of your expenses, and you will have to make sure you file all of your outstanding tax returns. On review, they may not agree to a CRA debt settlement, and you may need to consider a loan or insolvency to deal with your debt.

Taxpayer Relief Programs

Under certain circumstances, the CRA may forgive the interest charges and penalties you have or would accrue on the taxes you owe.

Eligibility is quite stringent, and you will have to prove that you are in extraordinary circumstances and financial hardship to qualify. These circumstances include:

  • Personal illness
  • Natural disasters
  • Severe emotional or mental stress
  • CRA errors or processing delays that led to additional expenses

They still will not reduce the amount you owe, even if you are eligible, but penalties and interest charges can be steep. There is a 5% late-filing penalty, plus 1% for each month you continue not to file after the due date. The penalty could increase to 10% if you were charged a late-filing penalty in previous years. Relief from these penalties can make a substantial difference.

Tax Debt Settlements

Debt settlement companies advertise that they negotiate with your creditors and offer them a lump sum payment to settle your debts at a discount. Even when you’re dealing with credit cards or payday loans, it pays to be cautious if you’re considering working with a debt settlement company. It’s important to know how debt settlement works in Canada before you turn to a debt settlement company for help.

Interest charges will continue to accrue while the company negotiates, and there is no guarantee that your creditors will accept the company’s terms. In addition, the debt settlement company does take a fee out of the amounts you put into a potential lump sum payment, which can be a significant loss if your creditors do not agree to negotiate.

If you owe a substantial amount of money to the Canada Revenue Agency, a debt settlement company will not be able to help you. The CRA never accepts less than the full amount they are owed from taxpayers.

As much as credit card companies or utilities may be reluctant to settle at a discount, they can ultimately choose to negotiate. The CRA does not have the leeway to negotiate the amount owing. While they have programs for providing relief from interest charges and late penalties, they cannot offer a reduction in the original amount owing.

Bankruptcy and Consumer Proposals: Resolving Your Tax Debt for Good

In some cases, it is just not possible to repay the taxes that you owe. High Canadian household debts have become increasingly common, and a surprise tax bill can push people over the edge. Canadian households spend a substantial portion of their income just carrying debts like mortgages, auto loans, student loans, and credit card bills. More than half of Canadians are less than $200 away from being unable to pay their debts and monthly bills. That leaves very little room for error, and a surprise tax bill could easily eat into the little room Canadians have to spare.

Unfortunately, the CRA also has little flexibility when it comes to dealing with individual income tax. Even if you have to choose between paying your taxes and making mortgage payments, there is not much the CRA could do beyond agreeing to the CRA debt settlement payments described above. If those payments are too much, or the CRA does not agree to tax debt settlement in installments, your remaining options include bankruptcy or a consumer proposal.

In Canada, you can file bankruptcy on debt owed to the CRA. This isn’t always the case in the United States, which can lead to some confusion. In addition to bankruptcy, CRA debt can also be included in a consumer proposal.

Bankruptcy and Tax Debt

One of the biggest concerns about tax debt is that the CRA can put a lien on your house or garnish your wages, preventing you from keeping up with your mortgage or auto payments.

When a lien is placed on your home, it’s like having a new mortgage on the property. It does not necessarily mean that foreclosure proceedings will begin, although it is a possibility. If you sell the property, the CRA will get paid first.

When you file bankruptcy, equity in your principal residence and equity in your vehicle are exempt assets that cannot be included in the process. If you are concerned about losing your home or your vehicle due to tax debts, bankruptcy is an option that can protect your most important assets.

Tax Debt Settlement with a Consumer Proposal

In a consumer proposal, you make monthly payments to your creditors instead of giving up assets. Making regular monthly payments may not sound very different from the CRA settlement payments program, but consumer proposals come with distinct advantages. Consumer proposals also come with relief from interest rates and can reduce the total amount you owe, something the CRA cannot do for individual taxpayers.

Insolvency proceedings may feel extreme, but if it is impossible to pay the CRA what you owe, they may be the only options available to you. The CRA can prove to be a persistent creditor, and it is much easier for them to escalate collection powers than other creditors.

Talk to a Licensed Insolvency Trustee about solutions to your tax debt. They can help you find a better way forward to get you back on track financially.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 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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