*This post was created in collaboration with Alpine Credits
If you earn an income, you need to pay income taxes. But while you may otherwise be diligent with paying taxes, sometimes you may find yourself owing a lot more than you anticipated. Whether you sold an investment asset, cashed in your RRSPs, or miscalculated your self-employment income, your tax bill may be higher than what you can cover. And if you don’t pay that debt when it’s due, you could face consequences.
To avoid any uncomfortable and potentially costly repercussions for owing money to the Canada Revenue Agency (CRA), you may be able to find some extra money by tapping into your home equity.
The question is, can you cover your tax debt with a home equity loan?
Can You Cover Your Tax Debt With A Home Equity Loan?
Yes, you can cover your tax debt with a home equity loan in Canada. If you own a home and have enough equity, you may be able to access some of that equity in the form of a home equity loan or home equity line of credit (HELOC). Then, you can use the funds to cover your tax debt.
Types Of Home Equity Loans You Can Use To Cover Tax Debt
You have some options when it comes to tapping into your home equity to cover your tax debt:
Home Equity Loan
A home equity loan allows you to borrow a lump sum of money based on the equity you have in your home. This loan typically comes with a fixed term and fixed interest rate. The loan is repaid over installments.
HELOC
A HELOC is a revolving line of credit, somewhat like a credit card, but is secured by the equity in your home. You can borrow up to a certain limit, and repay what you owe when you can. However, you’ll need to make at least the interest payments to keep the account in good standing.
This type of financing provides plenty of flexibility, as you borrow only what you need when you need it. During the draw period, you may only have to pay interest on the amount withdrawn.
Keep in mind that both a home equity loan and HELOC are backed by your home. So, if you default, you’ll put your home at risk of being Power of Sale or foreclosure, depending on where you live in Canada. Plus, there are closing costs to pay, so you’ll need to budget for a lump sum of money upfront.
Requirements To Tap Into Your Home Equity
To access the equity in your home as a form of financing, you’ll need to meet certain criteria, including the following:
- Sufficient income. The exact income requirements will depend on the lender. Some lenders, like Alpine Credits, may not look at income at all and may instead focus more on the amount of equity in your home.
- Debt level. Your income may be assessed relative to your debt by calculating your debt-to-income ratio, which is a measure of the amount of income you earn relative to how much of your income is dedicated to paying your bills.
- Credit score. Traditional lenders typically prefer to work with good credit borrowers. A good credit score is considered 660 and above. Very good to excellent credit will improve your chances of loan approval and securing a low interest rate.
- Equity. You’ll need at least 20% equity in your home to qualify for a home equity loan or HELOC.
Should You Use Your Home Equity To Pay Off Your CRA Tax Debt?
Before you cover your tax debt with a home equity loan, take some time to weigh the pros and cons first.
Pros Of Using A Home Equity Loan To Pay Off Your Tax Debt
The following are some of the perks that come with using your home equity to pay off your tax debt:
- Spread out your tax debt. Rather than having to come up with the money to pay your tax bill in one lump sum, you can borrow using your home equity to borrow funds and spread out your tax debt over a much longer period.
- Consolidate it with other debts. You can take a big chunk of money out of your home equity to not only pay your tax bill but also other high-interest debts you may have. Not only can consolidating your debt save you money in interest, but it can also streamline your finances.
- Interest-only payments. During the draw period of a HELOC, you may only have to make interest-only payments until the loan amount is due for full repayment. This can give you some time to recoup financially until you get back on your feet.
Cons Of Using A Home Equity Loan To Pay Off Your Tax Debt
Along with the upsides of using your equity to pay off your CRA tax debt comes a few downsides to consider:
- Potentially higher interest rates. The CRA will charge 9% on overdue taxes. If you can’t secure a rate on your home equity loan or HELOC lower than 9%, you could be paying more interest than you would by seeking alternatives, like arranging a payment plan with the CRA. On the other hand, if you can snag a rate lower than 9% with your home equity loan, this may be the better way to go.
- Your home is at risk. As mentioned, your home secures your home equity loan or HELOC. If you fall behind on your repayments, you could risk losing your home to lender repossession.
Can You Tax Debt Negative Affect Your Credit?
Having tax debt can have a negative effect on your credit scores if your tax amount owing is significant and the CRA decides to take actions that could indirectly impact your credit.
For example, the CRA may place a lien on your house as a way to secure repayment of your tax debt. This lien can appear on your credit report which may negatively impact your credit score.
By using your home equity, you can repay your tax debt and stop any potential effects that your tax debt could eventually have on your credit score. Plus, you can use your home equity loan to rebuild your credit score by making timely payments.
Why Use A Home Equity Loan Instead Of A Payment Arrangement With The CRA?
You have a few options if you can’t afford to pay your tax debt. One of them is to speak with the CRA to see if they agree to an alternative payment arrangement. However, there are some good reasons why you may still prefer to use your home equity to cover your CRA tax debt rather than using a payment arrangement with the CRA.
- Consolidate your debts with an equity loan. As mentioned, the government will charge 9% on amounts owed to the CRA. Whether your HELOC or home equity loan makes sense as an option to pay your overdue taxes depends on the rate you can get. If you can secure a lower interest rate with an equity loan, you can use the funds to not only pay off your tax debt but also consolidate all other debts.
- Alternative to qualifying for the CRA Fairness Application. This government program grants relief from interest and penalty fees for overdue taxes (excluding the principal portion of the tax debt). You need to qualify for this program to benefit from it. If you are ineligible for the program, then your alternative may be to apply for a home equity loan or HELOC to pay off this debt.
Final Thoughts
Regardless of why you’ve found yourself with a lot of tax debt, that money must be repaid. If the bill is much higher than you can comfortably afford, you can access your home equity to pay your outstanding tax debt. By doing so, you can avoid any actions the CRA may have otherwise taken to collect what you owe.
CRA Tax Debt FAQs
What happens if you can’t pay the CRA?
Can you get a loan if you owe taxes in Canada?
Do banks offer loans for tax debt?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
