Handling debt can be stressful, and if your creditor is the Canadian Revenue Agency (CRA), you could also face legal measures, like wage garnishing, seizing your bank account, and lien on your assets. Before the tax debt burden reaches the courts, you could proactively take some measures or opt for debt relief programs offered by the CRA to address the debt.

In this article, we will discuss tax debt and the steps you can take to manage it, depending on its severity.

What is Tax Debt?

Every individual and business is liable to pay taxes on the income they earn in Canada. There are various types of taxes – GST, income tax, business tax, withholding tax, capital gain tax and more. As a taxpayer, you self-assess your tax obligation and pay the tax when due. However, it creates a tax debt if you cannot meet your tax liability on the due date. A tax debt can also arise if you miscalculate your personal or business tax.

While these are typical scenarios, sometimes you face significant financial challenges that make the tax burden unmanageable.

Like all debt, tax debt also carries interest. For the third quarter of 2024, tax debt interest is 9%. You are better off taking a loan and paying down the tax debt than accumulating a 9% interest on the tax owed. The CRA also levies a 5% late filing penalty in the first month and an additional 1% for every month of delay.

The CRA keeps adding interest and penalties if you don’t pay the tax debt. It could also recover some of the tax dues from the monetary benefits it offers, like GST credits and childcare benefits. In the worst-case scenario, it can put a legal claim on your current and future property.

How to Apply for CRA’s Tax Relief Programs

The CRA can take extreme measures in the event of no communication. However, if you contact the agency for help, it offers various financial relief solutions to make tax debt manageable. When you don’t have money to pay the tax, follow the below steps:

File your returns on time to avoid the 5% late filing penalty. It will also help you determine your tax debt. Prepare a monthly budget by listing your income and expenses to determine how much money you can allocate toward tax payments. While calculating expenses, include the tax obligation for the current year. Otherwise, you will pay tax debt for last year but accumulate tax debt for this year.

The above budgeting exercise can help you determine an amount you can set aside monthly to pay down tax debt. Then select “Schedule a series of payments” in My CRA Account, input your outstanding tax debt, start date, and payment frequency to determine your monthly payment amount. The CRA allows you to stretch the payments to up to 12 months.

The CRA has to approve the payment plan, for which it may ask extensive questions about your financial situation. At this point, you will have to present the breakdown of your monthly income, expenses, liabilities, and assets with supporting documents and why you cannot pay your full tax debt or take a loan to pay tax. If the CRA is convinced, it will approve your plan.

However, the CRA will continue to charge interest on your outstanding tax debt. If you receive a lump sum amount, you can pay more than your monthly payment to reduce the outstanding tax debt and save on interest expenses.

Opting For Tax Debt Relief

If you cannot pay your monthly installments of tax debt, you could consider opting for the CRA’s taxpayer relief provisions or voluntary disclosure program. The CRA can waive interest and penalties through these programs but will not cancel principal tax. It has the right to collect the tax in the next ten years from the date it is due. If you want relief even in the principal amount, your only option is a consumer proposal or bankruptcy.

Taxpayer Relief Provisions

Under this program, the CRA will waive penalties and fees for late tax filing and payment if you are unable to pay tax debt due to uncontrollable circumstances like:

• Catastrophes and extraordinary circumstances such as natural disasters, severe illnesses, accidents, and serious mental distress.
• Errors or delays on the part of the CRA that led to the delay.
• Personal financial hardships, like unemployment or difficulty meeting necessities such as food, medical care, and shelter.

You can apply for this program by filing Form RC4288, Request for Taxpayer Relief — Cancel or Waive Penalties and Interest with the CRA. Keep documentation handy to prove your uncontrollable circumstances.

The Voluntary Disclosure Program

If miscalculating taxes or incorrect information in tax returns leads to tax debt, the Voluntary Disclosure Program (VDP) can protect you from penalties or prosecution. You are eligible for VDP if the error/mistake you want to correct is at least one year past due, is Voluntary (not spotted by the CRA), and the outcome is more tax payment and not tax refund. Ensure your data is correct when making corrections and that you have paid your estimated tax.

Within VDP, the CRA gives taxpayers a chance to come clean with two specific reliefs:

• The Limited Relief stream allows taxpayers to correct intentional non-compliance (tax evasion) and protect themselves from criminal charges. You will still have to pay interest or other penalties.
• The General stream allows taxpayers to correct other errors. The CRA can give partial interest relief for taxes owed over the past four to ten years.

Consumer Proposal and Bankruptcy

When everything else fails, filing a consumer proposal or declaring bankruptcy is the last resort. It can protect you from CRA’s extreme measures of wage garnishment, bank account seizure and more. You can pay a lower debt and settle all dues with the CRA.

A consumer proposal is a federal debt-relief program that:

• consolidates your secured and unsecured debt (including tax debt)
• negotiates a final payment lower than the actual debt, and
• gives you five years to repay the negotiated amount without accruing interest or penalties.

Bankruptcy can relieve you from paying your entire tax debt, but you might have to surrender some of your assets to creditors.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Tax Planning

You can avoid all of this with efficient tax planning. A skilled tax consultant can help you plan your taxes by finding ways to reduce tax liability or helping you prepare a budget to pay taxes. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best tax planning expertise, contact us online or by telephone at 905-517-2297.