Nobody wants to get on the wrong side of the Canadian Revenue Agency. But despite our best efforts, there may come a time in many Canadian’s lives where they just can’t manage to pay off their taxes and before they know it they’ve accumulated difficult-to-manage debt thanks to several years worth of unpaid returns. So what can you do if you owe money to the government? Is debt consolidation even possible with the CRA?
This article looks at the possibility of consolidating tax debt in Canada, discusses potential penalties and addresses whether or not debt forgiveness may be possible.
Can You Consolidate Tax Debt In Canada?
The good news is that you can consolidate tax debt in Canada. While a debt with the CRA isn’t the same kind of debt as a credit card debt or a loan, you have several options when it comes to consolidating tax debt. You can set up a payment agreement with the CRA, take out a personal loan or use your home equity to pay off what you owe.
How To Consolidate Tax Debt In Canada
Debt consolidation is when you combine several debts into one at a single (hopefully lower) rate of interest. Turning numerous debts with different interest rates and payment terms into one single debt can often be easier to tackle. Even if the amount owed is the same, it’s easier to keep track and pay off one main debt. Moreover, you may even save money if you get a lower interest rate than what you were paying when dealing with multiple amounts owed.
There are several ways to address tax debt with the CRA. You can create a debt payment plan directly with the CRA, get a personal loan or, if you own a house, you can take out a loan against the equity in your property.
How To Consolidate Tax Debt With The CRA?
If you can’t pay the balance owing on your tax return, take comfort in knowing that you are not alone. This is such a relatively common issue that the CRA has created a special payment arrangement option to help taxpayers manage their debts.
Set Up Payment Arrangements With The CRA
If you can’t pay off the balance owing on your tax return, the CRA will 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 can help make it easier to pay off your unpaid taxes by spreading your debt out into manageable payments based on your financial situation.
Note, however, that this option is not without financial consequences.
- 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. It’s also worth pointing out that when some people know they can’t make their tax payment they don’t file a tax refund or file it late. It is wise to resist this impulse. 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. So, even if you can’t pay your taxes, don’t make matters worse by filing late.
Other Ways To Consolidate Tax Debt In Canada
A 9% rate of interest is not really a bargain. It may be possible that getting a personal loan or a home-equity loan could get you a better interest rate and thus be a cheaper option.
How To Consolidate Tax Debt With A Personal Loan
A personal loan can be a smart choice for consolidating tax debt, especially if you have good credit. With a personal loan, you can consolidate all your debt (including your tax debt) all in one go and then just worry about staying on top of a single monthly payment to a single 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 favorable 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 line of credit or a home-equity loan. You can get a HELOC or home equity loan by tapping into your home’s equity. The more equity you’ve built up, the larger the loan can be. Furthermore, because you’re using your home as a guarantee against defaulting on loan payments, HELOC’s 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.
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 Have Your Tax Debt Forgiven?
Unfortunately, the CRA will not forgive a tax debt. To be frank, likely the best you can hope for is that they may be willing to cancel or waive penalties and interest. Here are your options for reducing your tax debt:
Cancel Or Waive Penalties And Interest
The CRA may cancel or waive penalties and interest if you can show extraordinary circumstances made it hard for you to pay your tax debt. This includes situations such as serious illness or CRA errors. 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 2024, your request must be related to a penalty for a tax year no earlier than 2014.
Bankruptcy And Consumer Proposals
If you really can’t pay off your tax debt through a payment plan or a loan, then there are a couple of other possible but drastic options.
- Bankruptcy. You could declare bankruptcy, which is a legal action that involves clearing potentially all of your unsecured debts, including your tax debts, however, doing so 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.
- 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%.
Both bankruptcy and consumer proposals are serious legal processes that should not be taken lightly. They can be appealing because they offer relief from difficult-to-manage debt, but they come with long-term consequences that can affect your personal finances and creditworthiness for many years and impact your ability to get credit or even find an apartment.
What Happens If You Can’t Pay Your Tax Debt?
There are numerous consequences you could face if you don’t pay your tax debt, including:
Late Fees
The CRA can charge you a late payment fee of up to a penalty of 5% of your balance owing and an extra 1% for every month you’re late, to a maximum of 12 months. In some cases, if you’ve already been charged a late penalty and received a formal demand for a return, the penalty can be increased to 10% and 2% per additional month. On top of the penalty fee, you’ll also be charged compound daily interest of up to 9% until the debt is paid.
Take Your Tax Refund
The CRA could take any future refunds owing 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.
Legal Actions
- Wage Garnishment: Your employer can be forced to garnish your wages by deducting a set amount of money from your paycheque and give 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.
Conclusion
It’s frightening and overwhelming when you feel like you can’t pay your tax debt. But there are solutions. Assess your options and decide what works better for you: contact the CRA to make a payment arrangement, take out a loan or tap into your home equity. By being proactive, you can take control of your financial situation.
