If you have tax debt from previous years or the current year, it’s important that you handle it sooner rather than later. The Canada Revenue Agency (CRA) is the body responsible for handling Canadian taxes and they will escalate the situation dramatically if you don’t deal with your tax debt. If you’re unsure how much you owe or how to manage your tax debt, you’ll find everything you need to know in this article.
Before you can determine how much you owe the CRA, you’ll need to file your tax return. If you haven’t filed your taxes for a few years, you’ll need to file returns from previous years too. Keep in mind that a tax year is January to December. April 30th is the filing deadline for personal income tax returns in Canada. If you have self-employment income, the deadline to file your income tax return is June 15th.
Unfortunately, filing late does result in penalties. The CRA fines you 5% of the balance owing, plus 1% for each full month your return is late with a limit of 12 months. You should always file on time to avoid penalties as they can make your tax debt larger.
If you’re expecting a large tax liability, you may be nervous or intimidated to file your tax return. However, you cannot handle the debt until you file your tax return. The CRA will not address your debt or help you with a solution if you do not file. It can be a burden to file taxes, but the sooner you do, the quicker you can eliminate your tax debt.
Once you file your taxes, you will receive a Notice of Assessment for every year you filed. Any penalties or interest will be added to your Notice of Assessment. If you owe tax, you’ll also receive a letter requesting you to make a payment or contact the CRA.
The CRA has an online portal that has information about your taxes, you can also see how much you owe in the portal after you’ve filed all your returns. To access your tax payable balance, log in to your CRA MyAccount and select the Accounts and Payments tab. Under this tab, select Account Balance and Statement of Account, you should see your balance owing there.
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The CRA offers various ways to pay, as listed below. You can choose whichever option works best for you. Keep in mind that some forms of payment can take several days or weeks to process so allow for processing time.
After you’ve determined how much you owe the CRA, you’ll need to assess whether you can afford to pay it in full or not. If you can’t afford your taxes, don’t panic. The CRA appears daunting on the outside, but they are actually quite accommodating when it comes to payment. All they ask for is communication. Even if you can’t work something out with the CRA, you have other options.
Consumers who are in debt to the CRA, but can’t afford it, can make arrangements to pay off what you owe over a predetermined period of time. In order for this to happen, you need to prove that you have unsuccessfully tried to pay back what you owe.
If they are willing to make a payment arrangement, the CRA will review your financial details and create a plan that works for both parties. After creating an arrangement with the CRA, you must keep up with your end of the deal and file future tax returns on time.
For more information about payment arrangements with the CRA, click here.
If you can only afford to pay part of your tax debt, you will need to make a payment arrangement with the CRA as well. You can make your first partial payment with the CRA to start the process. The CRA will apply your payment to your oldest tax balance unless you advise them to apply it to another tax debt.
Under very special circumstances, the CRA may relieve you from penalties and interest on tax debt. Note that this program does not relieve you of all your debt, only penalties and interest.
As mentioned, the relief program only applies to individuals in very special circumstances. The taxpayer must demonstrate an inability to pay due to financial difficulty and extraordinary conditions. Personal illness, severe emotional or mental stress, and natural disasters resulting in a taxpayer’s inability to pay tax debt are examples of extraordinary conditions.
When dealing with a consumer who has tax debt, The CRA typically requires full payment of the total amount due.
Tax debt is unsecured which means a taxpayer can file a consumer proposal to help relieve the burden of the debt. This will need to be done with the help of a Licensed Insolvency Trustee. The CRA will accept or reject your proposal based on the taxpayer’s circumstances, income and other assets. This is the only way to settle tax debt for less than the full amount.
Finally, if you’ve tried all else and still cannot repay your tax debt, you can consider filing for bankruptcy. If you can’t afford to pay your taxes, you might be struggling with other aspects of your finances which means bankruptcy may be an ideal option. When you are discharged from bankruptcy, you will be completely debt-free which means you’ll be free from tax debt too.
If you choose not to pay your tax debt, the CRA will take legal action. The CRA actually has more power than your average lender which could cause serious financial and legal hardship for you. Legal action typically starts 90 days after the mailing date of the taxpayer’s Notice of Assessment or Reassessment and you have failed to communicate with the CRA.
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Before moving forward with legal action, the CRA must do both of the following:
Once these actions have been performed, the CRA can pursue further legal action. Once the CRA has commenced with legal action, they usually will not stop.
The CRA is able to send a requirement to pay (RTP) to an individual, employer, bank, etc, that holds funds on your behalf or that owes your money. The RTP provides instructions to the third party to direct a certain amount of money to the CRA. Once the money is received by the CRA, they will apply it to your debt.
The CRA is allowed to get a certificate that confirms what you owe them. The certificate will make your debt public record which allows the CRA to place liens on your assets or seize assets. If this happens to you, the CRA usually will send you a notification by mail that your debt has been certified in Federal Court. The letter will also state that if you do not resolve your account, the CRA can take further legal action to collect the debt.
The CRA can place a lien on any of your assets or personal property including your home. If a lien is registered, the amount of debt owing will be secured and establishes creditor priority in the event of an asset or personal property sale. In other words, if you sell an asset or personal property with a CRA lien on it, the CRA will receive funds to repay tax debt before you receive any funds.
Finally, the CRA can obtain a writ or memorial which allows them to seize and sell your assets and personal property to repay your tax debt. The proceeds of the sale will also be used to pay the bailiff hired to sell your assets on behalf of the CRA. If any debts are still outstanding, you will be required to pay it as well.
As you can see, the CRA takes tax debt quite seriously and is one of the creditors you don’t want to mess with. To avoid legal action, it’s best to communicate with the CRA. The CRA typically uses legal action to get the taxpayer’s attention so they can resolve their tax debt. If they’re hearing from you, they are less likely to escalate the situation.
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Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.
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