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Would it make sense to consolidate your tax debt in Canada? It might, because each year of unpaid tax or failure to pay an assessment adds up, and not in the same way as other debts.

Why? Because the government has a lot of power other creditors simply do not have.

We’ve outline some simple ways that you can consolidate your tax debt in Canada without destroying your financial life.

How Did You Get Into Tax Debt?

Each year, we spend a lot of time filing our taxes, whether filing online for free or with accountants. But sometimes, we may find ourselves having an extra busy year and missing the tax filing deadline.

Missed the deadline? You might be charged a penalty. That is now a tax debt.

And for some people, they avoid the stress of tax season altogether by not filing any taxes. However, each year that you fail to file doesn’t erase any tax you might owe. Each tax year that you faill to file is a debt that you owe the government.

But is tax debt consolidation an option?

If you’re one of those people with multiple years’ worth of tax debt building up, you’re probably wondering what you can do to pay it all at once and get rid of that stress. As a result, tax debt consolidation may be an option for you.

Firstly, it’s important to note that tax debt doesn’t work exactly the same way as credit card debt. You may think that you can simply combine your balances and reduce the total amount you pay, but tacking tax debt doesn’t work like that.

Find out if owing taxes to the CRA will affect your credit score

What can the government do if you owe tax debt?

First, the government might be willing to negotiate payment with you. We cover that topic later in the article.

Second, the government can take legal action. We also discuss that below.

Third, the government can withold benefit payments for any unpaid tax amount. That means that you might not get your Canada Fed Deposit or GST/HST credit payment.

Finally, the government can take money from you in the following ways to repay your tax debt:

When Should You File Your Taxes in Canada? 

According to the Government of Canada, the due date for filing an income tax return and paying off your balance, is April 30, 2024. You can start filing as of February 20, 2024. For a self-employed individual, tax deadlines are June 15, 2024. As well as dodging a build-up of tax debt, filing on time will help you avoid dealing with a delay in any benefits or credits you’re eligible to receive.

When filing your taxes, it’s important to gather all the required information so you can effectively calculate your income. This is important if you have any deductions or credits your want to claim and need to support your eligibility. 

What Is Tax Debt? 

As we mentioned, tax debt is the build-up of unpaid tax returns. You may have accumulated this tax debt if you haven’t filed your tax return every year, or if you haven’t paid what you owed when your return was processed. Like any other debt, the tax debt can be equally as stressful.

Tax debt is any taxes that you owe to the Canadian Revenue Agency (CRA) after the filing deadline. Regardless of whether you filed your tax return on time, if you have not paid any or only a partial amount of what you owe, this is still tax debt. If you do opt to pay a partial amount, to avoid tax penalties, you must make a payment arrangement. This is an agreement between you and the CRA to pay your debt over a certain period. Remember, the CRA is allowed to take amounts from any benefits or credits you receive when you have a debt. 

Are you self-employed? Check out these common tax concerns for self-employed individuals.

What Happens If You Fail to Pay Your Tax Debt? 

If you don’t pay your tax debt, you will be subject to penalties. Regardless, it’s important to stay in good contact with the CRA if you don’t have the funds currently to pay off your debt. Otherwise, the CRA may take legal action if you don’t pay and fail to cooperate or contact them.  

The CRA will normally not start legal action until 90 days after the mailing date of the Notice of Assessment or reassessment. Before legal action commences, the CRA will provide you with:

  • three attempts at a verbal warning by telephone;
  • one written warning. 

Once the Canada Revenue Agency has started a legal process, they do not usually drop them.

3 Ways You Can You Consolidate Tax Debt in Canada

We all know that there are plenty of options for credit card or loan debt consolidation in Canada. But when it comes to tax debt, do the same options apply?

In Canada, you can make a deal with the CRA to obtain debt forgiveness. How much reduction you receive while making a payment arrangement depends on the programme you use. Let’s look at the three different ways you can consolidate your tax debt in Canada.

Negotiation of Payment Terms

One option that may work for you and the CRA, is to negotiate a payment arrangement. This will involve you paying back your taxes, in installments, over an agreed period of time.

To be eligible for this option, you must explain your situation to the CRA and file any outstanding tax returns. You must also prove your income and even provide a projection of future expenses.

Furthermore, you will likely need to prove that you cannot get afford the payments on or even get approved for a loan to cover the cost of your tax debt. With this option, the CRA may still charge extra penalties and interest. Lastly, it will be up to Revenue Canada whether they accept this offer.  

Check out these tax tips for low income earners.

Consumer Proposal

You may also contact a firm that will assist you in negotiating the terms of your tax debt. Tax debt can cause a lot of financial strain, just like any other debt. Because of this, you can talk to a Licensed Insolvency Trustee and file for a consumer proposal to help ease the burden of this debt.

A consumer proposal is like a soft bankruptcy. Your Trustee will negotiate certain terms with your lender or creditor to create a repayment plan where you’ll agree to pay a percentage of what you owe.

It’s important to note that a consumer proposal can affect your financial life in many ways, especially your credit score. If you want to monitor your credit score for free, you can use Compare Hub or many other third party providers.

Taxpayer Relief Programs 

At times, Revenue Canada may allow you relief from accumulated interest charges and other applicable penalties – although this is rare. You must provide all forms and information they request and can only request this relief within a 10-year period.

To be applicable for the Taxpayer Relief Programs, one must have extremely unique circumstances that proved the inability to pay. This could be due to a life-threatening illness, a natural disaster or serious emotional and mental stress. Otherwise, it may be a case where these additional costs were not at your fault, but due to the CRA’s errors or processing delays. 

Consolidating Tax Debt in Canada: The Bottom Line

Just like any form of debt, it’s evident that tax debt can have some huge implications for your financial life. It’s important to ensure that you file your tax return every year and pay what you owe in time to avoid penalties, interest and debt accumulation. 

If you find yourself in a situation where you have years of tax debt built up, you can consider consolidating your debt through a consumer proposal or by negotiating payment terms directly with the Canadian Revenue. 

Written by Grace Gearon from Marble Financial | Contributing Writer for Loans Canada

Marble avatar on Loans Canada

Established in 2015, Marble is a financial technology company on a mission to help Canadians learn to better manage their personal finances and build better credit. Through socially responsible lending practices, like their Fast Track Loan and Score-Up credit building product, Marble has allowed thousands of consumer take back control of their finances. Moreover, Marble uses AI to provide recommendations and plans to help Canadians improve their financial health. They're also a BBB accredited business with an A+ rating.

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