What Are Your Options for Canadian Income Tax Debt Help?

Dealing with income tax debt

Table of Contents

Unpaid taxes can be a difficult type of debt for Canadians to deal with. The penalties can be steep, and the Canada Revenue Agency has far more extensive powers to collect from you than other types of creditors. Tax debt can also be a challenge because it’s so unexpected. When you owe your credit card company, at least you understood you were going into debt when you charged a purchase to your card. Tax debt is often something Canadians weren’t planning for.

If you find yourself suddenly owing the CRA, it’s a good idea to take a step back and review the situation. Can you afford to pay the total amount owing? What are your options if you can’t afford to pay it all back? Should you borrow money to pay your tax bill right away?

Now may be a good opportunity to talk to Toronto Licensed Insolvency Trustees. You can book a free consultation to talk to someone about your debt and the options in front of you.

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How Do You Wind Up with Tax Debt?

When you collect a regular paycheque from a single employer and taxes are taken off directly from your cheque, you’re more likely to qualify for a tax refund when you file your return than wind up owing the CRA. Once tax credits and benefits are applied, it usually turns out that you overpaid, and the CRA reimburses you. However, that’s not the case for everyone, and more and more Canadians in recent years are finding themselves surprised by tax debt.

1) You Work More Than One Job

People who work more than one job may not have enough taxes withheld from their paycheques. This is often a problem for people who work one or more part-time jobs, where their payroll deductions for each job are under-calculated.

Often people working multiple part-time jobs are the least prepared for a tax bill at the end of the year. If you’ve consistently run into this problem, consider using the federal Form TD1 to increase tax deductions from your paycheque appropriately. You can give this form to your employer to help avoid a tax bill when you file your return.

2) You’re Self-Employed or Work in the Gig Economy

Your taxes become much more complicated when you’re self-employed, whether that’s full-time or as a second job. At present, the Canadian government considers app-based “gig economy” jobs, such as food delivery, a form of self-employment.

Self-employed Canadians are responsible for handling their own income taxes, Canada Pension Plan (CPP) contributions, Employment Insurance (EI) contributions (if you choose to opt-in to the Employment Insurance program), and HST collection. This can lead to a hefty tax bill at the end of the year. There are some tips you can use to prepare yourself:

  • Estimate your annual earnings and use an income tax calculator to determine how much you should set aside. You may want to keep those funds in a separate savings account.
  • Be aware that you pay both employee and employer CPP contributions. Together, that contribution will rise to 11.4% of your pensionable earnings in 2022.
  • You will have to start collecting and remitting HST once you earn more than $30,000 over the course of four consecutive quarters (or $30,000 in a single quarter).

3) You Made RRSP Withdrawals

Withdrawing funds from your RRSP adds to your taxable income. When you make a contribution, you can deduct those funds from your taxable income, usually translating into a bigger tax refund at the end of the year. You’re essentially putting that money away before it’s taxed.

You pay the tax when you make a withdrawal, and this can become an issue if you make an early withdrawal. Turning to your RRSP in an emergency can wind up costing you even more. An RRSP withdrawal will be charged at the highest marginal tax rate you qualify for. Plus, any withdrawals made before you turn 65 are subject to an immediate withholding tax.

4) You Collected CERB or CRB Payments

Pandemic-related benefits can also have an impact on your taxes. In the rush to get money into the pockets of suddenly-unemployed Canadians, CERB was not taxed at the source but still counted as income. That left Canadians responsible for it come tax time.

The Canada Recovery Benefit (CRB) that replaced CERB was taxed at the source, but only at a rate of 10%. It’s also worth learning about income limits and Canada Recovery Benefits. If you end up earning more than $38,000 in net income (before taxes) for the calendar year in which you received CRB payments, you have to repay 50% of the benefit that you received over the income limit.

For example, you received CRB payments from January to June and collected $6,000 in that time period. In July, you went back to work, and your net income for 2021 wound up being $40,000. You would have to repay 50% of the $2,000 you went over the limit for a total of $1,000 in reimbursements.

How the CRA Can Collect Debts

If you owe the CRA money that you can’t or refuse to pay, they have a wide range of tools that allow them to collect. The CRA will typically wait 90 days after mailing your notice of assessment before they take legal action to collect. They must also make one attempt to give you a verbal warning by phone and send one written legal warning.

Once you have been warned, the CRA can:

  • Withhold any money owed to you by an agency or department of the federal government and apply it to your debt. This includes GST/HST credits, future income tax refunds, and federal income.
  • Garnish your wages or your bank account. If you have savings, they can require your bank to redirect funds in your bank account to your debt. If you don’t, they can require your employer to redirect part of every paycheque.
  • Seize or place a lien on assets, including your personal residence. When the CRA registers a lien, your tax debt is automatically taken from the proceeds when you sell the asset.

These legal actions can remove the control you have over your finances and leave you in a worse position than before. If you receive a warning from the CRA, it’s time to take action about your income tax debt.

How to Manage Income Tax Debt

When you don’t have enough money to pay your income tax debt, credit counselling in Ontario can help you manage your finances, get out of debt, and start saving money. Part of credit counselling is finding a way of managing your immediate financial problems, such as income tax debt, but it can also give you the tools to navigate your finances going forward. There are two things you can do right now if you’re worried about your CRA debt.

#1 Contact the CRA When You Owe Money

One of the biggest tax mistakes that you don’t want to make is ignoring an amount owing or not filing your taxes because you’re worried you will owe money. You pay the interest penalties on those funds whether you file or not, and the CRA has extensive power to collect.

The CRA charges 5% interest on your balance owing for the year, plus 1% for every full month after you file. Older debts can face even higher penalties.

That said, if you’re facing financial hardship, the CRA may be willing to create a payment plan to recoup what you owe. They may even cancel or waive penalties, but you have to contact them and come up with a plan to repay what you owe.

#2 Talk to a Licensed Insolvency Trustee

Paying off your taxes when you are in debt from other sources is an even greater challenge. When you’re balancing car payments, mortgage payments, credit cards, student loans, and more, discovering that you owe taxes can feel like the last straw.

A Licensed Insolvency Trustee will walk you through your options for insolvency. Insolvency will involve either a consumer proposal or bankruptcy. They can explain the pros and cons of each method, including the effect on your credit , surplus income and bankruptcy, exempt and non-exempt assets, and how creditors vote on consumer proposals.

Income tax debt in Canada can be included in the insolvency process. While the CRA does have repayment plans available if you’re struggling with other types of debt in addition to taxes owing, insolvency may offer a better solution.

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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