Like loans and other bills, you’re required to satisfy your income tax debt. If you owe the Canada Revenue Agency (CRA) any money, you’ll need to pay the debt before it’s due. Otherwise, you could face consequences.
But what about your credit scores? Does CRA debt affect your credit score?
Key Points
- The CRA does not report your tax payments to the credit bureaus. So this debt won’t directly affect your credit scores.
- Your credit could be indirectly impacted, however, if the CRA sells your debt to a collection agency or takes legal action to collect an outstanding balance.
- If you can’t afford your CRA debt, consider working out a payment plan with the CRA or looking into taxpayer relief provisions.
Does CRA Debt Affect Your Credit Score?
Owing money to the CRA may not directly affect your credit score. That said, if you don’t pay your taxes in full and on time, or have an alternative payment arrangement, the CRA can take certain steps to collect the money, which could indirectly affect your credit score.
If you don’t pay your taxes to the CRA, there may be repercussions, including the following:
Interest Charges Or Penalty Fees
The CRA may charge interest on unpaid balances, or penalties for late tax return filings or missing payment deadlines.
Wage Garnishment
The CRA may ask your employer to withhold a certain portion of your pay and redirect it to the CRA to collect unpaid taxes. The garnished amount will be applied toward your debt.
Lien On Your Home
A tax lien may be placed on the title of your home or other valuable asset, like a car or business equipment, until you pay your outstanding balance. While the CRA has a lien on your title, they take precedence over others who have a stake in your home, including your lender. That means you can’t sell or remortgage your home until you pay off your tax debt.
Since a tax lien is a public record, it can have a negative effect on your credit score.
Seized Property
The CRA may even go so far as to seize your home or other property. Your property can then be sold, and the proceeds from the sale will be used to pay your debt.
Ultimately, if the CRA begins legal action to collect unpaid taxes, your credit score could suffer.
What Affects Your Credit Score?
It’s good to understand how your credit score is calculated. Depending on the credit scoring model used, the credit score you get can vary. However, five common factors are used to calculate credit scores:
Payment History ~ 35%
The most important factor that affects your credit score is your payment history. Bill payments made over recent years are recorded on your credit report. This includes payments that have been on time and in full, partial, late, or missed entirely. Those bills can relate to any of your credit products, such as your credit cards, car payments, installment loan payments, or mortgage payments.
If you’re late, short, or miss a payment, your credit score can be negatively affected. If you’re making payments on time and in full, on the other hand, your credit score can be positively impacted.
Debt-To-Credit Ratio ~ 30%
Also referred to as your credit utilization ratio, your debt-to-credit ratio often makes up the second-largest portion of your credit score’s breakdown. This ratio measures how much revolving debt you’re carrying relative to how much available credit you have.
For instance, if you’ve been charging a lot to your credit cards, getting near your credit limit, or maxing them out every time, it may negatively affect your credit score. On the other hand, if you’ve kept a low ratio (lenders generally like to see a ratio of 30% or lower) and have been managing your debt well, it can positively affect your credit.
Credit History ~ 15%
How you use your credit products and how long you’ve had them may have an impact on your credit score. For example, if you have a credit card that you’ve been using responsibly for several years, it’s actually good for your overall credit. It’s a good idea to keep these credit accounts open, even if you’re not using them, to benefit from a longer credit history and lower debt-to-credit ratio.
If you’re thinking of cancelling some credit cards to streamline your finances, consider cancelling the card you’ve had for the shortest time. Keep the one(s) you’ve had active the longest.
Public Records ~ 10%
A public record is any documentation that is publicly accessible. Some examples of public records include bankruptcy, consumer proposals, and liens.
Public records can have a negative impact on your credit score. They can remain on your credit report for 3 to 10 years, their effect fades over time.
Credit Inquiries ~ 10%
When you apply for a loan or credit product, the lender reviews your credit report to verify your creditworthiness. This is a “hard inquiry,” which may cause your credit score to drop slightly. However, this dip is typically temporary.
Multiple hard inquiries can make potential lenders suspicious of your financial stability, as applying for too much credit may not be considered financially responsible.
Who Reports To Canada’s Credit Bureaus?
Canada has two major credit bureaus, Equifax and TransUnion. Generally speaking, lenders and creditors report your credit activities to one of these bureaus. If you have a mortgage, personal loan, car loan, or line of credit, the lenders or creditors you owe typically report to the credit bureaus. More specifically, your payment history may be reported, including both on-time and late or missed payments.
Does The CRA Report To Canada’s Credit Bureaus?
The CRA does not report payment history or balances to the credit bureaus. In fact, they are not allowed to share your tax information with the credit bureaus because of their privacy rules.
In other words, if you owe a small amount in income taxes, paid your taxes late, or had any other problems that resulted in a relatively basic penalty, the CRA will not report it to the Canadian credit bureaus.
However, if you owe so much that it warrants a court case and a collection agency gets involved, the CRA might actually put a tax lien on your credit report. In this case, your credit score could be damaged.
How To Prevent Your Unpaid Taxes From Affecting Your Credit Score
Having bad credit can harm your financial and personal life. Not only could you have a hard time getting approved for a loan or credit product, but a bad credit score might even stand in the way of getting an apartment or a job.
If you owe money in income taxes, here are a few things you should do:
Work Out A Payment Plan With The CRA
If you’re at risk of missing your CRA payment deadlines or are already in debt, reach out and start working out a payment plan as soon as possible. If you prove that you don’t have sufficient funds to pay them in full, you can negotiate a multi-year plan, which you’ll need to adhere to until your debt is paid off in full. The longer you wait, the more you’ll owe and the worse the consequences.
Once you reach an arrangement with the CRA, you must hold your end of the bargain and make payments as required. Going forward, file your income taxes and make payments on time.
Manage Your Finances Responsibly
Odds are, poor spending and saving habits got you into the mess of owing the CRA money. In this situation, you’ll need to start improving your habits right away. That means spending less and saving more.
To pay the CRA what you owe, or to ensure you have enough to cover your annual income taxes before the payment deadline, consider opening a separate savings account for tax purposes. It’s helpful to have a rainy-day fund to cover your yearly income tax payments so you don’t have to draw from your chequing account. Then, eliminate or cut down on all unnecessary expenses to save as much as possible.
Look Into Taxpayer Relief Provisions
If your tax situation meets certain parameters, the CRA can give your case to the Minister of National Revenue. If your case is approved, the Minister can offer some relief by waiving or cancelling tax penalties, and interest fees. Check out the CRA website for more information and to see if your case would qualify for a taxpayer relief provision.
Consider Financial Hardship Provisions
If your financial and tax debt situation is out of control and you fear you won’t be able to afford necessities, the CRA may be willing to work with you. If the CRA verifies that you can’t pay what you owe in taxes, they may waive or cancel interest to make it easier for you to pay your debt. This may be a solution if you’re suffering a financial hardship making it difficult, if not impossible, to pay your debt.
Bottom Line
Paying your income taxes is just another bill that you’ll need to manage as a working Canadian. Failure to pay your taxes owed on time can come with a slew of consequences. This includes the potential for your credit score to be affected, albeit indirectly.
