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You know the old saying – there are two tings in life you can’t avoid – death and taxes. And yes, its that time of year again. Tax Season. But finding that you suddenly owe a significant amount of taxes to the Canada Revenue Agency (CRA) can be a nerve-wracking experience. Trying to figure out how to pay CRA for past debts, yet remaining current with your other obligations, can be overwhelming.
However, when grappling with tax debt, it's crucial to recognize that you're not alone, and viable solutions exist. To navigate this maze effectively, let's delve into some of the key reasons behind income tax debt, the repercussions it carries, and the spectrum of options available to resolve it.
Why is Tax Debt Lurking?
From a career shift to dipping into your RRSP, tax debt can manifest for various reasons, catching you off guard. Common scenarios leading to unforeseen income tax debt encompass:
- Inadequate tax setting aside for self-employment income. This is one of the main drivers in personal insolvency. Self-employed individuals who fail to account for personal tax debts or other tax obligations like collecting and remitting GST or payroll withholdings.
- Withdrawing from your RRSP within the tax period.
- Receiving a lump sum, such as a pension payout, sans tax withholdings.
- Drawing pension income without sufficient tax withholdings.
- Neglecting to file taxes in preceding years.
- Earning income from multiple sources, causing discrepancies in tax withholdings – this can mean as simply as hawing two part-time jobs or pension income along with employment income.
- Switching jobs mid-year, catapulting you into a different tax bracket.
- Incorrectly receiving government benefits, like CERB, and subsequently being asked to repay them.
Consequences of Ignoring Tax Debt
The CRA, as a formidable creditor, wields unique privileges for debt collection. Failure to settle tax debt can lead to various punitive measures, including:
- Withholding tax refunds and GST/HST cheques by CRA.
- Garnishing your income through wage garnishment – this requires prior collection Notice to you and your employer. If the CRA is really cranky, they can seek a 100% garnishment order which will garnish 100% of your earnings.
- Court Action – resulting in a judgment being registered against your assets such as real property. They can use the judgement to register a lien on your property which can hinder your ability to deal with your property in the future and may put you in default with your mortgage or limit your ability to sell real property or remortgage.
- Holding others (3rd parties) accountable for your tax debt through the "Notice of Assessment" under section 160 of the Income Tax Act. This happens if you have transferred assets (or given gifts) to others when you personally have unpaid tax debt. In these case, CRA will simply send a tax bill to the related party that received the gift and they will then be personally liable for your tax bill.
Special Tax Guidelines for the Small Business Owner or Self-Employed
Being self employed has many rewards but is also more challenging than being an employee where your tax obligations are deducted by your employer. Being self-employed or owning a business means that you have to be your own collection and payment officer for tax debts. You have to be dictated to stay of top of both the reporting obligations and payment. For each dollar you put into your own hands, make sure you are putting money aside (in a separate account or sending it directly to the CRA) to pay your personal taxes and GST obligations.
If you are just staring out, develop and understanding of how the Canadian Tax system works, or better yet, find a good local reliable bookkeeper/accountant and use them as a resource and support person to keep your reporting up to date and accurate. Paying for the professional advice is well worth the money and allows you to focus on generating the income in your business vs. worrying about paperwork and Tax filing obligations.
If you find yourself in the clutches of the CRA with an insurmountable tax debt, numerous informal and formal debt relief options await your consideration.
Talk and negotiate with the CRA
Start by bringing your tax filings are up to date. Demonstrating diligence in filing tax returns, even with an outstanding balance, enhances your negotiation stance with the CRA and avoids the label of “chronic non-filer”- a label that limits your ability to negotiate. Review your finances closely to see if you can repay the debt in full – always the cheapest option as it avoids additional interest charges. If you can’t pay it all off in full, you can negotiate a payment arrangement with CRA – they often allow you to pay over a 12-month period.
https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc4288.html
Before committing to such arrangement, put together a basic family budget will help identify the upfront and monthly payment you can afford. This helps you be sure of your negotiating position. Although full repayment may not be feasible, presenting a comprehensive plan that leads to complete settlement, which includes interest and penalties repayment, aligns with the CRA's debt recovery objective.
Leverage Fairness Provisions of the Income Tax Act
In some very limited and specific circumstances, CRA Fairness Provisions application process offers some relief from penalties and interest. When talking to CRA, request information about the Fairness Provisions of the Income Tax Act. Generally, the eligibility for this program hinges on demonstrating extraordinary circumstances and financial hardship preventing timely tax payments. Be prepared to make your case with CRA with documentation and proof. It's crucial to understand that, even if full or partial relief is granted under these provisions, the relief only applies to the penalties and interest charges levied by the CRA - the principal amount owed remains payable, unless a formal negotiation process is undertaken (see below)
Formal Debt Relief
Engage the expertise of a Licensed Insolvency Trustee (LIT) for formal debt relief such as C.E. Craig & Associates Inc., (with offices in Victoria, Nanaimo and Surrey). As an LIT we will guide you through available options under a formal debt elimination plan. We will sit down with you to discuss your options -, determining whether a consumer proposal or bankruptcy choice is the optimal path for you to make a fresh start. Formal debt relief solutions have proven instrumental in aiding Canadians in managing, reducing, or eliminating various debts, including tax debt. Filing a consumer proposal or bankruptcy halts collection activities, garnishment, interest accrual, and penalties.
Preventing Future Tax Debt Woes
The primary preventive measure against future tax debt is timely tax filing—April 30th for individuals and June 15th for the self-employed. Timely and full payments further safeguard against penalties and interest from the CRA. Keeping your filing history up to date reduces the risk of additional penalties and interest from previous tax years.
Knowing when to seek assistance is crucial when grappling with an outstanding balance with the CRA. If the burden becomes overwhelming, a Licensed Insolvency Trustee can provide valuable guidance. Understanding your array of options empowers you to confidently embark on the journey to a fresh financial start.
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