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You can’t get away from taxes. But what happens if you don’t pay your income taxes? Will that affect your ability to get approved for a home loan? Can you get a mortgage if you owe taxes in Canada? In this article, we’ll discuss the consequences of not paying your income taxes and how it may affect your ability to get a mortgage.

Key Points

  • If you owe the CRA taxes, pay back what you owe before applying for a mortgage.
  • You’ll likely have a tough time getting approved for a mortgage if you have outstanding tax debt to pay.
  • If you’re struggling to repay your tax debt, consider an alternative payment arrangement with the CRA.

Can You Get A Mortgage If You Owe Taxes In Canada?

Yes, you can still get a mortgage if you owe taxes in Canada. However, depending on how much you owe, it will be much more difficult, and you may not get the best rate.

Why Does Tax Debt Affect Your Ability To Get A Mortgage?  

The CRA has a lot of power when collecting unpaid taxes. And if you owe the CRA money, they’ll always be first in line to collect on what’s owed before anyone else, including your mortgage lender. Plus, they can even place a lien on your home to stake a claim in your debt and ultimately repossess your home to recoup the taxes you owe.

That’s why most reputable lenders don’t like to deal with borrowers who owe the CRA taxes. They’ll always be second in line to collect. If not enough money is left over after your home has been seized and sold by the CRA, your lender may not get back the money they lent you.

What If You Can’t Afford To Pay Your Taxes Before Applying For A Mortgage?

If you owe the CRA taxes but can’t repay them, it will likely be difficult for you to get approved for a mortgage. If you don’t have the money available to pay your taxes, consider one of the following options:

Speak With The CRA 

You can request taxpayer relief if your financial situation prevents you from paying your tax debt. 

  • You can ask the CRA to waive interest charges and late tax filing penalty fees.
  • You may also ask the CRA to accept late tax returns to claim tax refunds you may otherwise have been eligible for in previous tax years.
  • The CRA may also agree to work with you on an alternative tax payment arrangement if you’re having trouble with your finances.

If I Pay The Taxes I Owe, Will I Be Granted A Mortgage?

Once you pay off your taxes and can show proof of this repayment, you may have an easier time getting a mortgage.  

Even if you’re in the process of repaying your taxes, you may still have trouble getting a mortgage. Your lender will likely want to know that your taxes are dealt with before extending a loan to you. So, repay what you owe in full before applying for a mortgage.

How Does Owing Taxes As A Self-Employed Individual Affect Your Ability To Get A Mortgage?

It will be difficult to get a mortgage when you owe taxes as a self-employed individual, especially if you have been delinquent with your installment pre-payments.  

As is the case with salaried Canadians, self-employed individuals must ensure that they’re current on their income tax returns before applying for a home loan. If you still owe taxes, this will negatively impact your ability to secure a mortgage.

Again, mortgage lenders will hesitate to get involved when the CRA has first dibs on an asset, like your home. The lender will have to wait for the CRA to recoup what’s owed, leaving them vulnerable to losing out if there’s not enough left after the sale of your home. 

How To Pay Taxes When You’re Self-Employed

When you’re self-employed, you’ll have to be more involved in handling your taxes. Unfortunately, some self-employed Canadians may be unaware of their income tax obligations or may even neglect to file their taxes altogether.  

Regardless, you must file and pay your income taxes on time, usually in installments. Otherwise, you’ll have trouble getting a mortgage. 

If you’re self-employed, here are a few basic tips to ensure your taxes are filed on time and in full.

Keep Track Of Your Money And Set Aside Enough For Tax Purposes

Remember, at some point, the CRA will be aware of the income you’re making, and you’ll be expected to pay taxes on it. When you’re making money that isn’t automatically being taxed, it can be all too tempting to just spend it on whatever you need, without thinking of the consequences. 

But if you go too long without declaring your income and the CRA catches up with you, you could end up paying a hefty fine. Make sure you’ve set aside approximately 15% to 30% of your earnings in a separate account, specifically for tax purposes.

Keep Your Receipts And Consider The Expenses You Can Deduct

If you’re self-employed or a freelance worker, there may be expenses you can use as tax deductions to receive a better tax refund. Some common business expenses you may be able to deduct when you file your taxes include the following:

  • Home office expenses
  • Vehicle expenses
  • Leases
  • Capital assets
  • Marketing expenses
  • Insurance
  • Accounting fees
  • Legal fees

CRA guidelines dictate that business expenses must be reasonable. If you’re unsure, it’s best to check their official sources or speak to an accountant. 

For more information on the business expenses, you can deduct, visit the CRA website.

Retain Invoices 

When you start making money from self-employment, record any payments you receive. The best way is to create an invoice for the individual or company you are working with and log it in accounting software. This is how you’ll be able to keep track of all the income you’ll need to declare to the CRA in the coming tax season.

It’s recommended that a self-employed taxpayer holds onto all relevant business-related expense receipts for at least 6 years.

Understand Filing And Payment Deadlines

Just as you would with a regular source of employment, filing your self-employed income taxes needs to be done before the deadline of June 15th, 2024. Since this day falls on a weekend this year, the CRA will consider your filing on time if they receive your tax return on or before June 17, 2024. However, you’ll still need to have paid your income taxes by April 30th

As mentioned before, being self-employed means that a percentage of your paycheque won’t automatically be given directly to the CRA. Because of this, you’ll have no T4 slip to submit during tax season. Instead, you’ll have to fill out a T2125 – Statement of Business or Professional Activities form, a statement of your business income over the last year. If some of your expenses qualify as deductible, you can also list them on the form.

Pay GST/HST 

If your self-employment currently generates less than $30,000 yearly, the CRA will consider you a “small business” and you will not have to register for a GST (Goods and Services Tax) or HST (Harmonized Sales Tax) number. However, if your yearly income is more than $30,000, register for a GST/HST account through the CRA website. 

If you have a GST or HST number, you can start collecting these taxes from your clients. Come tax time, the GST/HST you collected throughout the taxation year will be remitted to the CRA. Remember, there may be different GST/HST rates charged depending on the source province of your clients, so make sure to double-check. 

Note that the HST only applies to certain provinces, including Ontario.

What Are The Consequences Of Not Paying Your Taxes In Canada?

If you don’t pay your income taxes, you may be subject to any one of the following consequences:

Final Thoughts

So, can you get a mortgage if you owe taxes in Canada? It is unlikely if you don’t pay them back first and clear any fines, or you may only qualify for one from an alternative lender with higher interest rates. 

If you don’t already have a mortgage but want to apply for one someday, pay your tax debt in full, then wait until you’ve managed to replenish the money you’ve lost. 

Once you’re back on track, lenders will see that you’ve worked hard to repair your financial situation, and you’ll have an easier time getting approved for the mortgage you want.

Mortgage And Tax Debt FAQs

Will owing tax negatively affect my credit score?

If you owe the CRA money, it usually won’t be noted on your credit report. As such, your credit score shouldn’t be affected. However, if the CRA sells your debt to a collection agency, this activity could harm your credit score.

Why would my mortgage lender turn me down for a home loan if I owe taxes?

As mentioned, the CRA would take precedence regarding debts owed. That means lenders would be placed second in line for repayment of money owed. If there’s not enough money left over after the CRA has been repaid, the lender in second place may not be able to collect the full amount of money they’re owed. In this scenario, lenders would likely turn down your mortgage application to avoid this default risk.

How will other types of debt affect my ability to get a mortgage?

The debt you carry relative to your income will play a role in your ability to secure a mortgage. If your current debt is already eating up too much of your income, there may not be enough left over for you to add a mortgage payment to the mix. This will affect your debt service ratio. If this ratio is too high, you could be turned down for a mortgage.
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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