Does Owing Taxes to the CRA Affect My Credit Score?
Tax Season 2017 is over, and summer is underway. For most that means taking it easy, spending a bit of money, and doing as much as possible before the cold winter weather rolls around again. For others, it means buckling down, working hard to save as much money as possible, and getting ready for Tax Season 2018. 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.
So, what happens to your credit history, report, score, 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.
Want to know how to get a free copy of your credit report in Canada? Click here.
What Affects My Credit Score?
Before we talk about how not paying your taxes affects your credit, it’s good to understand how your credit score is calculated. While it’s not the only factor that financial institutions, lenders, and other organizations examine when considering you for credit, loans and other financial services, a healthy credit score is an important part of your financial stability. Strictly speaking, there are 5 main components that affect the health of your score.
Your Payment History – 35%
A record of how and when you’ve been paying for your credit products makes up the largest portion of your credit score. This means that all the bill payments you’ve been making over the past six 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 score will drop. If you’re making payments on time and in full, your score will rise.
Utilization – 30%
The second largest portion of your credit score breakdown has to do with how much 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 will be very difficult to improve your credit score. But, once you pay your bills, your score should rise back up.
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 rating. 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.
Want to know what credit card churning is, and how it affects your credit score? Find out here.
Credit Product Variety – 10%
Just like a credit card that you use responsibly can be an asset, having a variety of credit products that you’ve been using wisely can be good for your credit score. If you have a credit card, mortgage, and a car loan, and you’ve been making all your payments on time and in full, your credit score will be affected positively.
Inquiries Made By Other Organizations
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 will cause your credit score 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 all within a short period of time, your score could drop significantly. 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.
“Soft inquiries,” on the other hand, can happen if you give permission to a potential employer during a job application, or when credit card companies wish to send you promotional offers. In fact, when you yourself request a copy of your credit report, it’s also known as a soft inquiry. However, soft inquiries have no effect on your credit score.
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?
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 score will definitely be damaged.
Will Unpaid Taxes Affect My Credit Score?
Yes! As we mentioned above, filing your income taxes late, or owing a little bit 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 can definitely ruin your credit when 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 will, in turn, damage your credit score significantly for up to 7 years.
To find out how a consumer proposal will affect your credit, click here.
How Do I Prevent My Credit Score From Being Damaged by My Unpaid Taxes?
Since a low credit score 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, canceling 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 destitute 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 score is such a valuable tool for your financial future, it’s best not to let it get too out of hand.
Paying Your Taxes is the Best Way to Maintain Your Financial Future
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.