As a CPA, I often find myself helping clients who are self employed but chronically behind in filing taxes. Once you get behind with CRA, it can become a dark vortex of late penalties and missed filing deadlines. Being self-employed offers many freedoms and opportunities, but it also comes with unique responsibilities, particularly when it comes to managing taxes.
In Canada, self-employed individuals face the task of remitting their own taxes, which requires discipline, financial planning, organization, basic understanding of the Canadian tax system, and asking for professional help when needed. However, unforeseen circumstances can arise, making it difficult to meet tax obligations. As a licensed insolvency trustee, I understand the challenges self-employed individuals may encounter with the Canadian tax system, particularly once someone falls behind in taxes.
What to do if you find yourself unable to pay your taxes to the Canada Revenue Agency (CRA)?
The Challenges of Self-Employment and Tax Obligations:
Self-Assessment and Remittance Responsibility:
Self-employed individuals must calculate and remit their own taxes throughout the year. This includes income tax, Canada Pension Plan (CPP) contributions, and, if applicable, Goods and Services Tax (GST)/Harmonized Sales Tax (HST). Unlike employees who have taxes deducted at source, self-employed individuals are solely responsible for accurately estimating and setting aside funds for tax payments.
Unfortunately, when starting out in business, individuals often do not plan and fail to account for the taxes that they are incurring on a monthly basis particularly in their first year of operation. They only become aware of their tax debt once they file their income tax returns for the calendar year and then by that time, they are already a year behind in payments. They then begin to make installment payments to CRA for the previous years tax obligations all the time being charged interest, and then not able to make arrangements for the ongoing monthly tax obligations. This feels like “double taxation” but really its just playing catchup.
Irregular Income and Cash Flow:
Self-employment often involves fluctuating income and irregular cash flow. This can make it challenging to estimate and set aside the appropriate amount of taxes, as income may vary from month to month or year to year. Failure to plan for tax obligations can lead to unexpected financial strain.
As mentioned above, business owners often make the mistake of behaving that their income is based on the money they have in their pockets a the end of the month. However, they fail to remember that some of that pocked money does not “belong” to them, but rather the federal government. (e.g. For GST – a small business owner who charges for GST on their product/services, is really acting as a tax collection agent for the government collecting the tax on behalf of the government) Not all the money in the small business owners pockets actually belong to them.
Complex Tax Deductions and Reporting:
Self-employed individuals are eligible for various tax deductions and credits. However, navigating the complexities of tax reporting can be overwhelming. Deductions for business expenses, home office costs, and vehicle expenses require proper record-keeping and accurate reporting, adding to the complexity of tax obligations.
This is when the small business owner just starting out can really benefit form good accounting advice and bookkeeping assistance. The advice early on can keep filings up to date and help to educate the business owner of their filing responsibilities.
What to Do If You Can’t Pay Your Taxes to the CRA:
Communicate with the CRA:
If you find yourself unable to pay your taxes on time, it is crucial to communicate with the CRA as soon as possible. Ignoring the issue will only exacerbate the problem. Contact the CRA and explain your situation honestly and transparently.
Don’t try to just ignore the problem and fall even further behind in filings and payments. Hiding from the issue will not make it go away. The first step is to appropriately file the outstanding returns. Failure to file the outstanding returns can result in CRA just picking amounts out of thin air to come up with a tax debt due (unilateral assessment) without even seeing an actual tax return. And they always pick a very big amount.
Explore Installment Payment Arrangements:
Once your have caught up on filing outstanding returns, the CRA offers installment payment arrangements to individuals who cannot pay their taxes in full. This allows you to make regular monthly payments over a specified period until the debt is cleared. By setting up an installment plan, you can avoid additional penalties, but they will continue to charge interest on your outstanding amounts.
As previously discussed, making installments for past debts owed is very tricky when also trying to stay current with installments owed for new tax debts. If you are self employed, you will often be required to make installment to CRA for the current year’s obligations.
See, Do I have to Make Installments to CRA?
Consider a Voluntary Disclosure:
If you know you are seriously behind in filing taxes, or have made errors or omissions on your tax returns, the CRA’s Voluntary Disclosures Program (VDP) may provide an opportunity to correct them. By voluntarily disclosing and correcting inaccurate or incomplete information, you can avoid the more severe penalties and potential legal consequences. Consulting with a tax professional or licensed insolvency trustee can help you navigate the VDP process.
Seek Professional Advice:
Many self-employed people in Canada find themselves owing money to CRA. CRA, (post Covid) has increased collecting efforts on outstanding debts. CRA has many tools in their collection box – they can garnish wages, seize assets, put liens of real property, seize future payments from customers etc. Once a CRA collections officer has been assigned, they often have escalating collection practices, sometimes making it almost impossible to continue in business (they have been know to garnish wages 100% and seizing business assets)
When facing tax challenges as a self-employed individual or business owner, finding a way to deal with CRA and continuing to make a living at the same time is a much desired outcome. Our LIT team has helped thousands of people and business negotiate with CRA to reduce or eliminate tax debt under our federally licensed debt restructuring plans. These plans governed by federal legislation can stop CRA collection actions immediately including stopping all ongoing interest charges or garnishments.
Conclusion:
Being self-employed in Canada comes with the responsibility of remitting taxes accurately and on time. However, unforeseen circumstances can sometimes make it difficult to meet these obligations. By communicating with the CRA, exploring payment arrangements, considering voluntary disclosure, seeking professional advice, and implementing better financial practices, self-employed individuals can navigate the complexities of the Canadian tax system and address their tax challenges effectively.
Remember, seeking assistance from C.E. Craig& Associates Inc. can provide the expertise and guidance needed to overcome CRA tax issues. All personal and corporate taxes, GST, HST, personal income tax can all be eliminated with either a bankruptcy or reduced under a payment plan such as a Proposal.
