A Guide to Tax Debt Relief Options Offered By the CRA

Tax Debt Relief Options

Table of Contents

When you cannot pay your taxes, you can quickly find yourself in a scary situation. Interest fees and penalties will begin piling up. Government benefits you routinely collect will stop being sent to you. And the Canada Revenue Agency (CRA) can take legal action, such as garnishing your earnings, freezing your bank account, or registering a lien on your home.

Luckily, the CRA understands that not everyone can pay their taxes in full by the due date. For that reason, it offers some financial relief solutions to make payment more manageable. Depending on your tax bill’s size, these measures could give you enough leeway to avoid the harsh consequences mentioned above.

In this article, we’ll explain the payment plans the CRA provides to help pay off your taxes over time and what you need to qualify.

Solution #1: Pay your CRA tax debt in installments

The CRA expects you to pay your tax bill in full by the deadline, which for most people is April 30. But if that’s not feasible, you can make a payment arrangement with the tax agency to pay off your balance over time through installments.

Under this plan, the maximum payment period the CRA allows is 12 months. That may seem like a short time frame compared to the terms most loans offer, but it could be enough of a window for you to progress with your tax debt. You can consider other solutions while you chip away at your balance.

Pursuing this solution has two benefits. First, you’ll have more time to obtain the money needed to pay off your tax bill.

Second, the CRA will delay pursuing aggressive collection actions against you (if it comes to that). When you owe the CRA money, the consequences can be severe if you fail to pay. Avoiding these harsh collection tactics will relieve you from further stress and allow you to focus on dealing with your tax debt.

How to set up a payment arrangement with the CRA

Here’s how to go about arranging a CRA payment plan:

Step 1: File your tax returns. The CRA will be more willing to accommodate you with a monthly payment plan if you’re current with your tax filings. So, if you have outstanding tax returns you need to complete, that should be your first priority.

Step 2: Calculate your monthly income and expenses. Now’s a good time to start if you’ve never prepared a monthly budget. The CRA provides a handy worksheet for tallying your income and expenses. Once you figure out where you stand financially, you’ll know how much you can afford to pay each month.

Step 3: Determine your ideal monthly payment. Use the CRA payment arrangement calculator to calculate your monthly payment, which you can access by logging in to your CRA My Account portal. Once logged in, select “Schedule a series of payments.” From there, you can enter your total outstanding debt, your payment schedule’s start date, and payment frequency to determine your monthly payment amount.

Step 4: Contact the CRA to set up a payment arrangement. The next step is to get in touch with the CRA to set up an official payment plan. To speak with an agent, call 1-888-863-8657. You can also make a payment arrangement through the CRA’s automated TeleArrangement service by calling 1-866-256-1147. If using the latter option, you’ll need to provide your social insurance number, date of birth, and the amount on line 15000 of your latest notice of assessment.

Before approving your payment plan, the CRA may ask you to elaborate on your financial situation and why you need an extension to pay off your tax debt. In that case, you’ll have to present a breakdown of your monthly income, expenses, liabilities, and assets and provide other documents supporting your request. You may also need to explain why you cannot obtain a loan to pay off your balance.

Step 5: Make your first payment. Once your agreement is finalized, you’ll make your initial payment toward your tax balance. The CRA offers several payment options, but the easiest is to set up a pre-authorized debit (PAD) or pay through your online banking. 

Step 6: Continue with your payment schedule. As part of your agreement with the CRA, you must make steady monthly payments at the agreed-upon dates until you fully pay off your tax debt. The CRA may periodically review your payment arrangement. 

If your financial situation changes drastically and you need to adjust your payment arrangement, notify the CRA immediately. Otherwise, it may commence with legal action to recover the taxes you owe.

While a CRA payment plan can help you get a handle on your taxes, it has a couple of downsides:

  1. Interest and penalties will continue accumulating on your balance until it’s paid off completely (with one exception, as we’ll explain in the following section).
  2. The CRA can still legally withhold certain government benefits you receive, such as GST credits and Canada Child Benefit (CCB) payments, and apply them against your outstanding debt.

Solution #2: Make a partial payment

If you can’t pay your entire tax bill by the deadline, you can make a partial payment by the due date and pay off the rest later. This option also involves setting up a payment arrangement with the CRA. 

The benefit of this route is that fewer interest charges are collected on your balance since you already paid a portion upfront. You can then gradually contribute more payments.

By default, the CRA will apply your first payment against your oldest balance, but you can ask them to put it toward another tax debt.

Solution #3: Apply for the taxpayer relief program

In some circumstances, the CRA will forgive the interest and penalties that have accrued or will accrue on your tax debt. This privilege is known as the Taxpayer Relief Provision. If your application is accepted, you’ll have a smaller tax bill to grapple with and, as a result, be more likely to afford your payments. The taxpayer relief provision can clear interest and penalties that you’ve collected on your debt within the last ten years.

However, the eligibility requirements are stringent; the CRA waives interest charges and penalties only under exceptional scenarios. You must show the CRA that events beyond your control prevent you from paying your tax debt in full.

Here are situations that may qualify you:

  • Extraordinary circumstances. This category includes things like natural disasters, severe illnesses, accidents, and serious mental distress.
  • Financial hardship. Examples of financial hardship include losing your job or being heavily in debt, mainly if interest charges constitute the bulk of your balance owed. The CRA will also consider you in financial distress if paying the interest would make it challenging to cover basic necessities such as food, medical care, and shelter.
  • Action by the CRA. The CRA will also consider you in financial distress if paying the interest would make covering basic necessities such as food, medical care, and shelter challenging.
  • Other circumstances. If your situation doesn’t fit the above categories, you may still be eligible for relief. Be sure to explain your situation thoroughly in your application.

Whatever your financial circumstances are, it’s crucial to provide detailed facts and documents to validate your request for relief. List the steps you’ve taken to resolve your tax debt, such as cutting back on expenses and applying for loans. The more specific you are, the better.

Visit the CRA website for further information on how to qualify for taxpayer relief. To apply for the program, complete and submit form RC4288. Alternatively, you can apply online through your CRA My Account.

Remember: the taxpayer relief program forgives interest and penalties, not the principal.

Can you ask the CRA for a debt settlement?

Can you negotiate a debt settlement with the CRA whereby you pay a smaller percentage of the taxes you owe? Unfortunately, the answer is “no.” The CRA will never accept less than 100% of your balance—the only part of your debt they may be willing to forgive are the interest charges and penalties.

As a result, there’s no advantage to hiring a debt settlement company to help you lower your tax debt. It has no power to compel the CRA to accept less than the entire principal. Therefore, always be skeptical of any debt settlement company that says otherwise. There’s a good chance they’re trying to scam you.

While it’s impossible to arrange a debt settlement with the CRA, there’s an exception to this rule: filing for insolvency with help from a Licensed Insolvency Trustee. Read below to learn how this option works.

Consumer proposal and personal bankruptcy: debt relief solutions for when you can’t pay your taxes

If you’re in dire financial shape, it may not be possible to pay your tax bill. Unfortunately, the CRA offers little help in this scenario. The best they can do is cancel your interest and penalties. You’ll still be responsible for the entire principal, and it’s unlikely they’ll give you more than a year to repay it.

If you’ve run out of solutions, filing a consumer proposal or bankruptcy are your remaining options.

A consumer proposal is a federal debt-relief program in which you consolidate your unsecured debts and negotiate a payment plan with your creditors to pay less than what you owe. If your creditors accept your proposal, you can pay off your remaining debt over five years. As a bonus, no interest or penalties will accrue on your balance.

The good news is that you can include your unpaid taxes in a consumer proposal, as they count as an unsecured debt.

Bankruptcy is an alternative to a consumer proposal, usually reserved for those with the most severe debt problems. Unlike a proposal, bankruptcy will clear your unsecured debts completely. The downside is that you must surrender some of your assets to creditors. However, with your unsecured debts gone (including tax debt), it can give you the freedom to rebuild your finances from scratch.

The bottom line on CRA tax debt relief options

While intimidating and aggressive in its collection actions, the CRA still prefers cooperating with individuals struggling to pay off their tax debt. If there’s no way you can pay what you owe by the deadline, contact the CRA immediately to explain your situation and work to find a resolution. The longer you wait, the more interest and penalties will accumulate, and the more likely the CRA is to employ legal tactics to get you to pay.

If you’re dealing with back taxes that are causing you stress, a Licensed Insolvency can help you find the best path to give you financial relief. Whether revamping your budget, arranging a payment plan with the CRA, getting a debt consolidation loan, or filing a consumer proposal, we can find the right solution to get the tax debt relief you need. Contact David Sklar & Associates to book a free consultation today.

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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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