If you’re a taxpayer, it should be no secret by now that not paying your taxes comes with a slew of consequences that could significantly, and negatively, affect your financial life. But what happens to your credit report, scores, and rating when you fail to pay your taxes? Does the Canada Revenue Agency even report your unpaid taxes to Canada’s credit bureaus? And, if they do, what kind of impact would that have on your financial health afterward?
In the article below, we’ll talk a little bit about the tax collection process in Canada and just what would happen if you forget to, or avoid filing, your income taxes.
What Affects Your Credit Scores?
Before we talk about how not paying your taxes affects your credit, it’s good to understand how your credit scores are calculated. Depending on the credit scoring model used, the credit score you get can vary. However, there are five common factors that are used and depending on the credit scoring model used, the weight placed on each factor can vary.
Your Payment History ~ 35%
A record of how and when you’ve been paying for your credit products usually makes up the largest portion of your credit scores. This means that all the bill payments you’ve been making over the past six to seven years are recorded, whether those payments 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, your mortgage, etc. If you’re late, short, or miss a payment, your credit scores can be negatively affected. If you’re making payments on time and in full, your credit scores can be positively impacted.
Your Debt-To-Credit Ratio ~ 30%
Your debt-to-credit ratio often makes up the second-largest portion of your credit scores breakdown. This has to do with how much revolving debt you’re carrying, versus 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 scores. 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.
Your Credit History ~ 15%
How you use your credit products is important and the same goes for how long you’ve been using them for. For example, if you have a credit card that you’ve been using responsibly for a number of years, it’s actually good for your overall credit. So, if you have a number of credit cards, but are thinking of cancelling one or more of them to streamline your finances, make sure to cancel the card you’ve had for the shortest period of time, and keep the one(s) you’ve had active the longest.
Check out what credit card churning is, and how it affects your credit scores?
Your Public Records ~ 10%
Public records refers to the derogatory remarks in your credit report, which may include bankruptcies, consumer proposals, lawsuits, liens, and accounts in collections. All of these remarks can have severe negative impacts on your credit.
Credit Inquiries ~ 10%
When a bank or lender reviews your credit report because you’ve submitted an application with them, it’s known as a “hard inquiry.” Hard inquiries may cause your credit scores to drop slightly and will show up on your credit report for 3-6 years. This means that if you submit too many credit or loan applications within a short period of time, your scores could drop. Multiple hard inquiries can also make potential lenders suspicious of your financial stability, as applying for too much credit is not a financially responsible thing to do.
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. This includes credit card companies reporting your credit card usage, lenders reporting your mortgage payments (as a side note, not all mortgage lenders report to a credit bureau), lines of credit, car payments, etc. Your payment history, meaning on-time and missed payments, short payments, late payments, withdrawals, and other transactions should also be reported, then compiled into a credit report.
Does The CRA Report To Canada’s Credit Bureaus?
The Canada Revenue Agency has a privacy policy that reduces the amount of information they are permitted to inform other organizations about its taxpayers’ activities. 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.
Learn more about what you can do if you can’t pay your taxes.
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. Essentially, if your tax case is so bad that it becomes a matter of public record, that’s when Canada’s credit bureaus will get wind of your situation and your credit scores could be damaged.
Will Unpaid Taxes Affect My Credit Scores?
Filing your income taxes late, or owing a little bit of taxes likely won’t be cause for the CRA to report you to the credit bureaus, assuming of course that you’ve worked out a payment plan with them. However, owing a large amount could affect your credit if the CRA takes you to court and your tax debt is made a matter of public record. In fact, if your debt is too large, you might even end up having to file for a consumer proposal or bankruptcy, which in turn, can damage your credit scores and stay on your credit report for up to 7 years.
How To Prevent Your Unpaid Taxes From Affecting Your Credit Scores?
Since low credit scores can not only affect your financial health but your personal life, it’s best that you go through a few necessary steps to make sure that your unpaid income taxes don’t have such a significant impact on it. After all, the majority of lenders won’t want to lend to a would-be borrower with a long record of not paying their debts, financial instability, and poor credit.
If you owe money in income taxes, here are a few things you should do:
Contact The CRA Immediately And Work Out A Payment Plan
If you already owe a lot of money, chances are that the CRA has already contacted you and warned you about the consequences of not paying your taxes. If you haven’t yet, it’s very important that you inform them right away and start working out a payment plan as soon as possible. If you can 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 will be.
Manage Your Finances Properly By Saving and Spending Responsibly
According to many financial professionals, it’s a good idea to have a separate savings account specifically for tax purposes. If you’re working a regular job that provides a T4 slip, your taxes should be extracted automatically from your bi-weekly paychecks. However, if for some reason you still owe money to the CRA, it’s good to have a rainy-day fund to cover your yearly payments, so you don’t have to take the money 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 over to the Minister of National Revenue. If your case is approved, the Minister can offer some relief by waiving, cancelling tax penalties, and interest fees, etc. 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 so out of control that you fear you won’t be able to afford basic necessities because all your money is devoted to paying your debt, don’t worry. Once again, if you appeal to the CRA, and explain your situation, the Canadian Government will ensure that you won’t be left in financial destitution and that you’ll have enough money to afford things like groceries, living, and medical expenses.
Any one of these options, while they might not be easy or quick, is far better than filing for bankruptcy. Since your credit scores are such a valuable tool for your financial future, it’s best not to let it get too out of hand.
Taxes And Credit Scores FAQs
What are soft inquiries?
Will bankruptcy get rid of my tax debt?
Can I use a loan to pay my tax debt?
Bottom Line
Nobody likes paying taxes. Most people consider it a chore to go through the motions of filing their income taxes, year in, year out. However, it’s important to remember what paying your taxes does for you and our economy. Being up to date and filing your income taxes properly is not only a way to keep yourself financially stable, but it helps the Canadian Government finance various programs like education, health care, employment insurance, etc. If you want to maintain good credit, and a solid financial future with it, one of the first steps is contributing your share.
