If you owe money to the Canada Revenue Agency (CRA), you may be wondering if you can consolidate your tax debt to make your repayments more manageable.
Fortunately, the answer is yes: you have options to consolidate tax debt in Canada. Let’s take a closer look at what tax debt consolidation is, how it works, and the benefits and potential risks involved.
Key Points
| Can you consolidate tax debt? | In short, yes! |
| Ways to consolidate tax debt | – Personal Loan – Home Equity Loan – CRA Payment Plan |
| Can tax debt be forgiven? | – The CRA will not forgive your tax debt. – You can use bankruptcy or a consumer proposal to absolve your tax debt (conditions may apply). |
What Is Tax Debt Consolidation?
Tax debt consolidation involves combining multiple types of tax debt you may owe, such as income tax debt, property tax debt, and capital gains tax debt, into one loan or repayment plan. This simplifies your payments by cutting down multiple debt payments into a single one, making debt management more feasible.
Can You Consolidate Tax Debt With The CRA?
You may be able to work something out with the CRA if you’re unable to pay your outstanding tax debt. In fact, the CRA has created a special payment arrangement option to help taxpayers manage their debts.
If you can’t pay off the balance owing on your tax return in a lump sim, the CRA may allow you to set up a pre-authorized repayment plan with them. You can also call the CRA to discuss the payment terms and set up a series of automatic withdrawals from your bank account on pre-determined dates.
It’s vital to understand that a payment plan doesn’t mean that you reduce how much you owe. Your debt remains the same, but the payment plan make it easier by spreading your debt out into manageable payments based on your financial situation.
How To Set Up Payment Arrangements With The CRA
You can schedule automatic pre-authorized debit payments with the CRA from your bank account in the following ways:
- Online: To schedule your payments online, you can do so through your My Account or My Business Account.
- By Telephone: To set up a payment arrangement for your tax debt over the phone, you can contact the automated TeleArrangement service 1-866-256-1147, or call the number on your notice and speak with an agent.
Learn more: What To Do When You Owe Money To The CRA?
Other Ways To Consolidate Tax Debt In Canada
In addition to working out a payment plan with the CRA to help you pay your tax debt, there are other options to help you consolidate this debt:
How To Consolidate Tax Debt With A Personal Loan
With a personal loan, you can consolidate your tax debts, and other debts you may have all in one go. Then you’ll just have to manage one monthly payment to one creditor.
You can also negotiate payment terms to ensure that you spread payments over a timeline that’s manageable for you and aligns with your financial situation. This is a good option for those with a good credit score because loans are easier to secure and you’ll get a more favourable rate since you’ll be seen as creditworthy.
As long as the interest rate you’re offered is lower than the CRA’s, consolidating debt with a personal loan can be a good financial move.
How To Consolidate Tax Debt With Your Home Equity
Another good option for consolidating tax debt could be a home equity loan or home equity line of credit (HELOC). Both of these options require you to own a home and have a certain amount of equity on your property.
The more equity you’ve built up, the larger the loan can be. Furthermore, because you’re using your home as a guarantee, HELOCs and home equity loans tend to have lower rates of interest than an unsecured loan. You’ll get an even better rate if you have a strong credit score.
Be sure to compare the differences between a HELOC and a home equity loan to get the loan that’s right for you.
Learn more: Can You Cover Your Tax Debt With A Home Equity Loan?
| Note: While a loan based on your home’s equity can be a cheaper option, it can be a more risky approach to paying off your tax debt. That’s because if you default on your loan payments, your lender can take your property. Therefore, it’s crucial to carefully consider your financial situation and ensure you can repay the borrowed amount before opting for a home equity loan or HELOC. |
Can You Pay Your Taxes With Your Credit Card?
The government of Canada does not provide the option to pay your taxes via credit card. While you can’t directly pay your tax debt with a credit card, there are third-party platforms like Paysimply that can facilitate the transaction.
Learn more: How To Pay Your Income Taxes With A Credit Card
Can You Have Your Tax Debt Forgiven?
Unfortunately, the CRA will not forgive a tax debt. If your financial situation is particularly dire, you may need to look at other options, though some may come with financial consequences.
Cancel Or Waive Penalties And Interest
You may reach out to the CRA and see if they’re willing to cancel or waive penalties and interest. To do this, you’ll need to show that extraordinary circumstances made it hard for you to pay your tax debt. This includes situations such as serious illness, severe mental stress or natural disasters.
Note also that you can only request that penalties and interest be waived from tax returns that are no older than the previous 10 years. So in 2025, your request must be related to a penalty for a tax year no earlier than 2015.
Bankruptcy And Consumer Proposals
If you can’t pay off your tax debt through a payment plan or a loan, then there are other possible, but more drastic, options.
Bankruptcy
Bankruptcy is a legal action that involves clearing potentially all of your unsecured debts, including your tax debts. This is not a simple process, so you’ll want to consult with a bankruptcy attorney about your situation before choosing this route.
Further, declaring bankruptcy can severely damage your credit score and stay on your credit file for up to seven years. Moreover, it will make it difficult if not impossible to get credit like loans or credit cards for years until the bankruptcy is removed from your file.
Learn more: Does Bankruptcy Clear Tax Debt In Canada?
Consumer Proposal
A consumer proposal is a somewhat less drastic step and doesn’t involve clearing your debt completely, but is a legally binding way to reduce the amount you owe and give you easier-to-manage payments.
Typically, a consumer proposal involves making monthly payments for up to five years and can reduce your debt by up to 70-80%. Like bankruptcy, consumer proposals can negatively affect your credit score.
What If You Don’t Pay Your Tax Debt?
If you allow your tax debt to go unpaid, you could face consequences, which may include the following:
- Interest Charges. The CRA will usually charge interest on unpaid debts. The interest rate (which can change quarterly) is compounded daily and can add up quickly. Presently unpaid taxes are charged a rate of 9% interest.
- Late Penalty Fee. The government charges a penalty for filing your taxes late of 5% of your balance owing, as well as an extra 1% for each month you’re late after the income tax deadline.
- Tax Refund Withheld. The CRA could take any future refunds you may have and put the funds towards your debt. This includes your tax return refunds and certain CRA credits and benefits like the GST/HST tax credit. However, other benefits such as the Canada Child Benefit will not be withheld to recover your tax debt.
- Wage Garnishment. Your employer can be forced to garnish your wages by deducting a set amount of money from your paycheque and giving it to the CRA.
- Tax Lien. The government can put a lien on your home until you pay your debt. You would not be able to sell or mortgage your home during this time.
Factors To Consider Before Consolidating Your Tax Debt
Before consolidating your tax debt, be sure to consider the following:
- Interest Rates. While consolidating your tax debt may make repayment more manageable, it won’t eliminate any late fees or interest accrued if you’re late on your payments. Further, make sure you understand what interest rate you’ll pay on the consolidated debt and whether it makes financial sense in your situation.
- Loan Eligibility. If you’re looking to apply for a personal loan to consolidate your tax debt, make sure that you find out what the loan eligibility factors are, and whether you meet them. For instance, there may be minimum credit score requirements to meet. Find out what your credit score is before applying, which you can do using online tools like Loans Canada’s CompareHub.
- Impact On Your Credit. Some debt consolidation options, including consumer proposals and bankruptcy, can negatively affect your credit score. Make sure you understand these implications before choosing an option.
- CRA Payment Plan Terms. If you decide to negotiate a payment arrangement with the CRA, ensure you understand the terms of the new plan. If you don’t stick to the agreed-upon payment schedule, you could face additional repercussions.
Final Thoughts
If you’re having trouble paying your tax debt, you can consolidate it with a loan to help spread your payments and make them more affordable. You can also arrange a payment plan with the CRA or take more drastic measures like a consumer proposal or bankruptcy. Just be sure to carefully consider your options and understand their potential consequences, and seek professional advice before deciding which route to take.
