Tax season is quickly approaching, and while some Canadians look forward to receiving some extra cash through their refund, others are worried that they’re going to wind up owing more money than they’ve already paid.
Tax debt can be very intimidating to deal with. The Canada Revenue Agency, or CRA, has more power to collect directly from you than other types of creditors. Interest charges and penalties can also add up even before you’ve been contacted about an outstanding balance.
When you’re faced with tax debt that you can’t afford to pay, it’s natural to look for CRA debt forgiveness options. There are options that exist, but they may not be easy to access or help as much as you need.
If you have an unpaid balance owing to the CRA, you will need to act promptly to avoid further interest charges and penalties. David Sklar & Associates services can help when you don’t know what to do about your debt. A Licensed Insolvency Trustee will walk you through all of the options you have for dealing with unsecured debts.
CRA Debt Collection Powers
The CRA’s collection powers include garnishing your wages, freezing your bank account, withholding tax refunds and benefits, and even seizing and selling your assets. If there’s evidence that you deliberately evaded taxes, you could also face court fines or even jail time, though this is reserved for extreme cases.
When the CRA garnishes your wages, they require your employer to direct part of your paycheque directly to them instead of to you. With a garnish on your bank account, they can compel your bank to surrender a large part of your savings to pay off your tax debt. This can leave you in a very difficult financial position and jeopardize your ability to pay for necessary expenses and other bills. You may need to borrow more money to keep up with expenses like rent, mortgage payments, or car payments.
The CRA placing a lien on your property can be just as devastating. They can even place a lien on your principal residence. A lien must be paid before you are able to sell or refinance the property. After the sale, if there is still an amount owing, you continue to owe the CRA.
Other creditors such as credit card companies can use some of the same collection powers, but they require a court order to do so. This can be an expensive and time-consuming effort, and they may only resort to these actions if you owe a large sum. The CRA, on the other hand, can use many of these powers without a court order.
CRA Debt Relief Programs
If you’re facing a large tax bill that you can’t afford to pay, you do have options, but it’s important to know that there are no CRA debt forgiveness rules. The CRA cannot settle for a reduced payment. They must pursue the full amount that you owe.
That said, the CRA offers taxpayer relief provisions that can waive interest charges and penalties on the amount that you owe.
Any balance owing to the CRA is charged interest in addition to a number of penalties for filing late or having an overdue balance. Late filing penalties can add up quickly, as they are usually a percentage of what you owe. The percentage climbs the longer you delay filing.
If you believe you are going to owe the CRA tax debt, don’t try to ignore the problem. Filing your taxes late will only incur higher penalties. It is better to file your taxes on time and find a solution to tax debt right away, as ignoring it can make the situation much worse.
Are There Programs for CRA Debt Forgiveness?
We are often asked if debt forgiveness from the CRA is an option. While their taxpayer relief provisions will cancel interest rates and penalties for those that qualify, they do not reduce the principal. Under the Income Tax Act, the CRA does not have the ability to offer debt forgiveness in Canada beyond waiving interest charges and penalties. You will still have to pay the original amount that you owe.
This can be an issue for those who owe more than they can afford to pay, even without added interest charges. You may be able to set up a payment arrangement with the CRA that will allow you to pay your balance over time through several regular payments. To set up an arrangement, begin by calculating your monthly income and expenses to determine how much you can afford to pay each month. Once you have an idea of what you can really afford, you should contact the CRA.
However, the CRA considers itself a priority creditor and can be aggressive about collecting from you. They may not be concerned about other debt obligations you have and may even suggest that you borrow more money, such as a debt consolidation loan, in order to pay your taxes owing immediately.
Even if the CRA agrees to a payment plan, they will not reduce the principal. However, the CRA can be included as a creditor in bankruptcies and consumer proposals.
How to Deal with Tax Debt
Since you cannot negotiate a CRA tax debt settlement that includes a reduction to the principal, you will have to explore other avenues to find debt relief. Although the CRA will not provide debt forgiveness on its own, tax debt owed to them can be included in the insolvency process.
When you cannot afford to pay your unsecured debts, there are two ways to have your debts discharged without paying the full amount: bankruptcy and consumer proposals. The CRA can be included as a creditor when you file either of these proceedings.
When you file bankruptcy, your non-exempt assets may need to be sold, with the proceeds going to pay back your creditors. Even if the proceeds do not satisfy your full debts, you are nevertheless discharged from those debts and no longer owe your creditors. Your credit score will be impacted, but several important asset types are exempt from bankruptcy proceedings, including your principal residence and some equity in a vehicle. Depending on how much you owe, bankruptcy can be preferable to the CRA placing a lien on your home.
With a consumer proposal in Ontario, you work with a Licensed Insolvency Trustee to propose fixed monthly payments that can last for a period of up to five years. Those payments are disbursed to your unsecured creditors. The majority of your creditors (according to how much you owe) will have to agree to the proposal, but if they do, all of the included creditors are bound by the agreement, including the CRA.
Tax Tips for Those Who Collected CERB or CRB
Tax debt can be even more daunting when you weren’t expecting it. If you collected CERB or CRB, you might expect to owe the CRA some amount. How much will depend on circumstances such as:
- Which of the two benefits you collected.
- How many payments you received.
- How much you earned during the rest of the year.
CERB payments were not taxed at the source, meaning anyone who collected them would have to hand part of it back to the CRA. Tax planners at the time suggested saving 20% of the benefit for taxes.
In 2021, the CRB (Canada Recovery Benefit) replaced CERB. While it was taxed at the source, the CRA still requires recipients to repay part of the benefit if they earned over $38,000 in net income during the same calendar year in which they received CRB benefits.
If your after-tax income exceeds $38,000 when you file your taxes for 2021, you will have to repay 50 cents on every dollar of CRB you received over $38,000. For example, if you received $1,800 in CRB payments (for two periods, after-tax), but you earned $36,000 in the rest of the year, you would owe nothing extra. If you earned $40,000 in income for the rest of the year, you would have to return half of the benefit, or $900.
In some cases, you may receive a CRA collection letter for CERB repayment under other circumstances. For example, you may have to repay CERB because you received double payments or you did not meet income eligibility requirements. If it turns out that you were not eligible to receive CERB, even if it was an honest mistake, you would have to repay CERB. This can put people in a very difficult situation, especially if they believed income such as EI earnings, student loans, social assistance, or benefits were considered eligible income.
It can be very difficult dealing with CRA tax debt when you have a low or fixed income. If you find yourself in this situation, it’s worth exploring CRA debt relief programs. However, you may also have to explore insolvency options if it is impossible to repay what you owe.
While you cannot negotiate a reduction in the principal tax amount you owe to the CRA, you can apply to have interest charges and penalties waived. You can also book a consultation with David Sklar & Associates to discuss your options for reducing tax debt.