Some Canadians look forward to tax season, knowing they’ll get a hefty refund. However, others aren’t so lucky if they owe money to the Canada Revenue Agency (CRA) instead. If you fall into the latter group, you must pay your balance to the CRA by April 30th.
But what if you lack the funds to cover your tax bill and thus cannot pay? In that case, you could face harsh financial penalties, steep interest charges, and even legal action by the CRA, which boasts more power to collect unpaid tax debt than your typical creditor.
Dealing with the CRA can be intimidating and exhausting. Still, the tax agency offers some financial relief measures for those struggling to pay off their tax bill. In this guide, we’ll explain the consequences of failing to pay your taxes and what you can do to avoid them.
What happens if you don’t pay your tax debt to the CRA?
The CRA has broad powers to collect unpaid tax debt. And unlike your average creditors, it can pursue you without getting approval from the court. Here are some of the consequences you might face:
Penalties and interest. If you don’t pay your taxes on time, the first thing that will happen is your balance will begin collecting interest charges. Interest will start accruing on May 1 and compound daily at the prescribed rate. As a result, your balance owing will steadily rise, making it that much harder to pay off. You’ll also incur a late filing penalty if you file your tax return late. This penalty equals 5% of your balance, plus an extra 1% each month it remains outstanding for up to 12 months.
Withholding of federal benefits. The CRA may apply your unpaid balance against federal benefits that you’re entitled to receive. In other words, you’ll lose access to these government funds until you fully pay off your tax bill. Some examples of benefits you could lose are the GST refund, Canada child benefit, and Canada Pension Plan (CPP).
Bank account freeze. The CRA can freeze your bank account without warning to coax you into paying your taxes. As a result, you’ll lose the ability to conduct regular financial transactions. It can also compel your bank to surrender a chunk of your savings to cover your balance owed. A bank account freeze can leave you in a precarious financial position and jeopardize your ability to pay necessary expenses and other bills.
Wage garnishment. The CRA can garnish your wages, meaning they can collect directly from your paycheque to cover your tax debt. All it needs to do is issue a requirement to pay (RTP) to your employer, who, upon receiving it, is legally obligated to remit a portion of your earnings to the CRA.
Property liens. The CRA can place a lien on your property, including your home, to enforce the collection of unpaid tax debts.A lien gives them priority over the funds received following the sale of the property to which it’s secured. In other words, the CRA will get paid before you can collect even a single dollar. If any debt is outstanding after the sale, you’re still obligated to repay it.
Asset seizure. Sometimes, the CRA will apply for a writ or memorial to seize your assets and sell them to recover unpaid taxes. It can go after any asset it deems valuable enough to pay off your balance, including your car, artwork, or personal residence. You’ll still be responsible for paying any remaining taxes after the fact.
How long will the CRA wait before taking legal action?
It’s important to understand that the CRA won’t immediately freeze your bank account, garnish your wages, or confiscate your assets. It’ll not normally pursue legal action until at least 90 days after your notice of assessment or reassessment mailing date.
Before pursuing legal action, the CRA must take the following steps to collect your tax debt:
- Make three attempts to give you a verbal warning by phone
- Make one attempt to give you a written warning via a letter.
If, after these steps, you still haven’t paid your balance, the CRA is free to employ various legal tactics to collect the money owed. And once it decides to go down this route, it won’t stop.
There are some exceptions to the 90-day waiting period for legal action. If the CRA believes there’s an elevated risk of failing to recover your tax debt, it can apply to the court for a jeopardy order. Doing so secures it with the right to take immediate steps to enforce collection, including asset seizure.
How long can the CRA pursue you for unpaid taxes?
The CRA has a 10-year collections limitations period, which is the amount of time it can pursue you for unpaid taxes. This time frame begins 90 days after the issuance of your notice of assessment or reassessment.
However, the collection limitations period can reset or extend if you or the CRA take specific actions. Some examples include making a voluntary payment, contacting the CRA to arrange a payment plan, or filing an appeal with the Tax Court of Canada. You can find a complete list of these actions here.
Can you ask the CRA to forgive your tax debt?
Unfortunately, the CRA will never forgive your tax debt—you’re legally responsible for paying every dollar of the principal. It won’t negotiate a settlement where you pay less than you owe.
But don’t panic or despair—the CRA offers several taxpayer relief options if you cannot afford to pay your tax debt, which we explore in the following section.
How to work with the CRA to resolve your tax debt
Despite how menacing the CRA may appear, the organization is quite accommodating regarding tax payments. As long as you maintain open communication and are honest about your situation, it’ll help you find a way to resolve your tax bill.
If you have yet to do so, get your income tax returns filed. Doing so lets you determine precisely how much you owe and, thus, how much money to set aside. Plus, you can minimize late filing penalties and interest charges and demonstrate to the CRA that you’re serious about dealing with your tax liability.
Next, assess the taxpayer relief options below. If you have questions about the best choice for your situation, you can contact the CRA directly.
Payment arrangement. Consider negotiating a payment arrangement with the CRA if you can’t pay your balance in full by the deadline. The benefit of this option is you end up with a payment schedule that will allow you to pay down your balance over time through fixed payments. The CRA will assess your financial situation and assist you in creating a suitable payment plan. If you have a CRA account, use the payment arrangement calculator to give you an idea of what you can afford to pay each month.
Partial payments. Paying something is always better than paying nothing. If you can only afford to contribute a partial payment, the CRA will be more than happy to accommodate you, provided you pay the remaining balance in the future. This option also involves setting up a payment arrangement with the CRA.
Relief programs. Under exceptional circumstances, the CRA may spare you from penalties and interest charges on your outstanding balance. Of course, you’ll still have to pay the entire principal. To qualify for this relief measure, you must demonstrate that you’re experiencing severe financial hardship and cannot pay off your tax bill. To request taxpayer relief, fill out and submit Form RC4288.
What if you can’t afford to pay what the CRA demands and are out of options?
While helpful, you may need more than the CRA’s financial relief options to handle your tax bill. The CRA considers itself a priority creditor and isn’t concerned about your household bills or other debt obligations you may have. It may even suggest you borrow money, such as a debt consolidation loan, to pay your taxes immediately. And even if the CRA agrees to a payment plan, it won’t forgive a dollar of your principal.
If your tax debt is too overwhelming, reducing or eliminating it is a better solution. In Canada, there are two federal government programs that can help you discharge your debts: bankruptcy and consumer proposal. You can include your CRA tax obligations in either of these of these proceedings.
When you file bankruptcy, you may need to sell your non-exempt assets, with the proceeds going to pay back your unsecured creditors, including the CRA. Even if the proceeds don’t fully satisfy your debts, you’re still discharged from them and no longer owe your creditors. Your credit score will drop, but bankruptcy can be preferable to the CRA garnishing your wages or placing a lien on your home.
With a consumer proposal, you negotiate a new payment plan with your unsecured creditors. Unlike the CRA’s taxpayer relief program, a consumer proposal eliminates a sizable chunk of your principal, potentially up to 80%, with the balance payable over five years.
Only a Licensed Insolvency Trustee can legally file bankruptcy or a consumer proposal on your behalf in Canada.
The bottom line on failing to pay the CRA
If you owe the CRA money but cannot pay, many problems can ensue. Penalties and interest will start accruing on your balance, and you could lose access to government benefits you rely on to get by. The CRA can also garnish your wages, freeze your chequing account, and seize your assets without obtaining a court order.
However, you can avoid these risks by proactively addressing your tax bill. Start by filing any outstanding tax returns to determine how much you owe. Then, contact the CRA to make payment arrangements using a schedule that fit your budget.
While you cannot negotiate a reduction in the principal tax amount you owe to the CRA, you can submit a request to waive interest charges and penalties. Make sure to commit to the plan you agreed to and promptly report any changes to your situation to the CRA.
When you have a low or fixed income, dealing with CRA tax debt can be challenging and frustrating. Sometimes, you may need to explore other options, such as consolidating your debt or filing a consumer proposal. If you need help finding the right solution, book a free no-obligation consultation with David Sklar & Associates to learn about your tax debt relief options. We can help you get the CRA off your back for good!
