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.

Let’s Talk

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. 

Share This!

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on pinterest

Ready to live debt free?

Jerry is a very patient person, he answered all my questions and made this experience so smooth and easy for me. I was not sure what to expect but dealing with him made me feel so much better. He sure knows what he is doing and how to put people at ease for sure (should have done this long ago). I recommend him to anyone I am so glad I had him on my side and now to do my part. Thanks Jerry ur greatPattie
Patty Murphy
21:34 18 May 22
Rhoda Lewis helped me achieve a fresh start two and half years ago! She was very professional with a very warm, caring personality! I emailed her today with a question and she responded quickly. She's great at her chosen profession!!
Debbie Livingston
01:24 11 May 22
Nothing but good things to say about Jackie. She was so nice and so understand and everything was so quick and easy. In a matter of a week, there was the solution that I never thought was possible. Thank you so very much for everything that you have done. ❤️❤️❤️
Cassandra Keenan
21:05 10 May 22
I was in a lot of debt and stress, Jackie Stanley with David Sklar & Associates was very professional, and extremely helpful with getting out of debt. I should of did this sooner, they take the all the weight and stress of a persons shoulders, amazing team at David Sklar & Associates!!
Hubert Z
03:08 10 May 22
Jackie helped me out during a really tough time and she made the entire process very easy and painless. I highly recommend reaching out to her if you find yourself in any financial trouble. You won’t be disappointed!
prettylush 13
02:42 10 May 22
I had a good experience with Jackie. Making appointment to see her was easy and follow up was great. I appreciated the detailed information she gave and the clear explanation of the options I had. While I landed on this company without anyone's recommendation, I will be happy to recommend their services to those who need them.
Kipyego arap Serem
19:00 09 May 22
Jackie has been really helpful with my issues. She is approachable and friendly and I recommend her to anyone trying to access her services.
Ankita Sisodia
18:51 09 May 22
The service that was provided to me from Trina at David Sklar and Associates was nothing but superb! I was referred to them through family, and Trina was nothing but understanding and so so so helpful! Every part of the process was smooth and efficient and she explained everything to me so I would be able to understand the process. Can’t believe the weight that has been lifted off my shoulders. Thank you so so much Trina!
Christina Ivany
15:52 07 May 22
I’m so glad that I spoke to Rhoda. I was nervous having to claim bankruptcy, but Rhoda is very resourceful and has a wonderful way of putting you at ease. I felt like I was speaking to my best friend. Rhoda from the bottom of my heart thank you for your help and kindness it goes along way. Linda Bennett
Linda Bennett
15:29 06 May 22
I was absolutely terrified of admitting I needed help and was in a tough position where my best option was to file for bankruptcy. As someone with severe anxiety it was one of the hardest calls I had to make but once I spoke with Trina at David Sklar she immediately made me feel at ease and like I was in good hands. I mostly dealt with Trina and Eva who were so kind and communicative throughout the whole process and made it as painless as possible.I did briefly speak with a couple of other associates from time to time and they were also equally as lovely. The reviews for this company obviously say a lot about these guys and it rings true. I’m not someone who usually writes lengthy reviews but I am happy to recommend David Sklar and associates for anything. Thank you guys for always treating your clients like human beings and always being available for questions or concerns.
Emma Higgins
19:14 02 May 22
js_loader