Owing money is never fun, especially when you owe the government. The Canada Revenue Agency (CRA) — the governing body responsible for overlooking the collection of taxes in Canada — is known for their strict tax debt collection practices.
Interest rates and fees often apply when you’re late to pay the CRA. These additional costs on top of a tax bill can be hefty; so much so that you may need a tax loan to cover the total cost of your debts.
Let’s take a closer look at tax loans in Canada, how they work, and why you may want to consider one to relieve your tax obligations from the CRA.
Key Points You Should Know About Tax Loans
- A tax loan can help you pay your income taxes on time to avoid penalties from the CRA.
- A tax loan is a good alternative if you can’t make payment arrangements with the CRA.
- You can spread the cost of your tax loan over a long period to keep your payments affordable and within your budget.
- Tax loans are available from banks, credit unions, and online alternative lenders.
What Are Tax Loans?
Technically, a tax loan is just like any other type of personal loan. The purpose is to gain access to the money needed to repay the government at an affordable rate.
Tax Loans For Consumers With Good Credit
For consumers with good credit, finding an affordable unsecured personal loan shouldn’t be too difficult. Your local bank will likely have an option for you.
Your main goal should be to find a lender who you trust and like working with. Once you apply and get approved, you’ll be transferred the money and then can use it to pay back the CRA.
Tax Loans For Consumers With Poor Credit
For individuals with poor credit or who have struggled financially in the past, it can be more difficult to find an affordable loan. Affordability is important when it comes to finding a loan to pay off your taxes, so you may need to provide collateral or get someone to co-sign your loan.
How To Check Your Credit Score?
Before you apply for a tax loan in Canada, it’s essential that you know where your credit stands. This will allow you to understand what kind of lenders and loans you can qualify for. Similarly, if you have bad credit, you can try to improve it before applying for a tax loan.
Thankfully, there are many platforms you can check your credit score for free in Canada, including Compare Hub.
Where To Get A Tax Loan In Canada?
Generally speaking, you have three main options when it comes to applying for a personal loan:
- Banks
- Credit Unions
- Online alternative lenders
Depending on your financial situation, any of these lenders may be a good option for you to consider.
Remember, finding the right loan involves consideration and understanding of your current financial situation and future goals. Whatever financial product and lender you choose should align with your budget and goals.
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Is Using A Loan To Pay Off Your Taxes A Good Choice?
As with all personal finance decisions, the right choice depends entirely on your unique situation. To determine if using a personal loan to pay off your tax debt is right for you, consider the pros and cons below.
Pros Of Tax Loans
- Affordable Payments. With a personal loan, you’ll be able to pay off the CRA right away and then make affordable payments to your lender each month. You can avoid the added stress of owing money to the government.
- Flexible Loan Terms. Personal loans tend to have terms anywhere between one and five years, depending on the lender.
- Variable Loan Amounts. As with the loan terms, the loan amounts are very flexible. You should be able to get the amount you need to cover your tax bill.
Cons Of Tax Loans
- Fees. The terms and conditions of a loan can have a lot of fees. Make sure to read the agreement in its entirety before accepting it. Otherwise, you could end up paying more than you budgeted for.
- More Debt. If you can’t afford the cost of a loan right now, do not take out a loan. Taking out debt that you can’t afford could result in a nasty cycle of debt.
- Potentially High-Interest Rates. High rates are always a possibility, especially if your credit score is low.Be sure to compare multiple options to ensure you get the lowest interest rate possible.
Tax Loan Alternatives
Sometimes a tax loan is not an option due to inability to get approved, poor credit, or simply because a loan is not the right option. Fortunately, there are other solutions to handling your tax debt.
- Payment Plan with CRA. A payment plan can be negotiated with the CRA so long as the plan results in the complete repayment of your tax debt. Under this option, you will still be required to pay applicable penalties and interest.
- CRA Fairness Application. This program provides relief from interest and penalties, but not the principal part of your taxes. In order to qualify, you must prove extraordinary circumstances and financial struggle that further support your inability to repay your entire tax owing. You may need a tax lawyer to assist you with this option.
- Consumer Proposal or Bankruptcy. If you file a consumer proposal or bankruptcy, the CRA will relieve you from your tax debt. Note that with a consumer proposal, you will be required to make an offer to the CRA as you would with all your other creditors.
Consequences Of Not Paying Personal Taxes On Time
In Canada, the deadline to file your personal tax return and pay your taxes is April 30th of every year. If you fail to meet this deadline, the following penalties will apply to you:
- Late filing penalty of 5% of the balance owing
- Penalty of 1% of the balance owing for every full month you don’t file (applicable for 12 months)
- Additional interest charged on top of the above penalties
- Daily interest compounded on the balance owing (rates vary depending on the CRA’s guidelines and decisions)
- Tax refund held back until you file your tax return, even if you don’t owe taxes on the return in question
As you can see, these penalties are quite harsh. In extremely rare cases, these penalties can be waived. Usually, the CRA will only waive penalties if the return was filed late for reasons beyond your control.
If this applies to you, you will need to complete and submit a Request for Taxpayer Relief (RC4288). Note that the completion and submission of this form does not automatically waive the fees, as the CRA must consider your case and approve your request.
Can CRA Debt Negatively Affect Your Credit Score?
Owing money to the CRA is typically not reflected on your credit report or your credit score. That’s because there is a privacy policy in place with the CRA that limits how much they can share with credit bureaus and other entities. This includes personal tax information.
That said, if you owe income taxes to the CRA, there are other issues you may have to deal with that could indirectly affect your credit score.
For example:
- The CRA could take you to court to collect the taxes owed. If that happens, your tax debt would be available on public record. Since the credit bureaus collect and report on public record issues, this information could affect your credit report and credit score.
- Your credit score could also be impacted if the CRA enlists the services of a collection agency to collect your tax debt, which could also appear on your credit report.
- The CRA could also put a tax lien on your credit report, which will also affect your credit score.
Can I Use My Home Equity To Pay My Taxes?
If you’re a homeowner and have accumulated a sizable amount of equity in your home, you can tap into it to pay off a hefty tax bill.
Home equity loans are secured, so they’re easier to get approved for than unsecured loans. Because they’re backed by your home, home equity loans also tend to come with lower interest rates because of the reduced risk, and loan amounts are typically much higher, too.
To qualify for a home equity loan to pay off your tax debt, you’ll need at least 20% equity in your home. The lender will also want to have your home appraised to make sure it’s worth at least as much as the loan provided. If approved, you can use your home equity to pay your tax debt, then continue making regular installment payments to pay off your home equity loan.
Tips On Using Tax Loans
When you carry tax debt, the best thing you can do is pay it off as soon as possible. This will minimize any negative repercussions from the CRA. As such, a tax loan may be a viable option.
However, it’s important that you use these loans wisely to avoid getting yourself further into debt. Before applying for a tax loan, keep the following tips in mind:
- Make sure your payments are affordable. A tax loan will require monthly payments to repay the loan amount, plus any interest charges. Make sure these payments fit comfortably within your budget before taking out a tax loan.
- Consider all your other debt. Taking out a tax loan means adding more debt to the pile. While the intention is to use the funds from a tax loan to pay off what you owe the CRA, you’re still taking out a loan. Make sure the addition of a new loan will not be too much for you to handle financially, especially if you’re already carrying other debt.
- Be careful with your collateral. If you’re using a secured loan to pay off your tax debt, such as a home equity loan, be sure to keep up with your loan payments. Your collateral is at risk if you default on your loan. So, if your home is securing the loan, for instance, you could risk losing it if you fall behind on your loan payments. Only take out this type of loan if you’re absolutely certain that you can comfortably make the additional payments.
Interested In A Tax Loan To Pay Off The CRA?
Using a personal loan to cover the cost of taxes is a feasible option for many. The CRA is one of the most notorious creditors out there, so it’s best not to get on their bad side by paying your taxes on time and in full. If using a tax loan sounds right for you, Loans Canada can help you obtain the financing you need today.
