Many self-employed people, presently or in the past, have accumulated tax arrears at some point. The CRA has strong powers to make sure they collect what people owe.
- They charge penalties and interest on all tax arrears.
- They can withhold child tax credits and GST credits until the arrears are paid.
- They can take money from your bank account or your paycheque (through a garnishee).
What’s more, CRA will not willingly accept less than full payment. They have millions of taxpayers, and can’t afford to set a precedent that would force them to accept less from everyone else – So you must treat tax arrears seriously, and promptly. If you put it off, it’ll get bigger, and CRA may take steps that really disrupt your life.
Start by knowing what you really owe. Make sure you have submitted all your outstanding tax returns. CRA will insist on this anyway, and you need to show that you are acting in good faith. Review all your returns for the past several years to make sure you are taking advantage of all possibilities to reduce what you owe. Professional help from an accountant or tax preparation service could be a good investment, unless your case is exceptionally simple.
When you are certain of the tax arrears balance, consider your possible income tax debt solutions, starting with the simplest.
If you can’t pay all you owe immediately, you may be able to negotiate a payment schedule. Contact your nearest CRA office, explain your circumstances, and offer a schedule that you can manage. For example, if you owe $1,000, you may offer to pay $100 per month for the next ten months. CRA will probably agree to let you pay over time, but:
- They will insist on getting the full amount owed.
- They will continue to charge interest and penalties until your tax arrears are paid off.
They will probably not accept a repayment period greater than one year. If CRA does not accept your offer, they are likely to take further action against you to collect the taxes you owe. Because of this, you must be ready to try another solution.
You can probably get a loan to finance the tax payment over a period greater than one year, if:
- Your income and expenses permit you to repay your full tax debt within a reasonable time
- You can provide security for the loan, such as a second mortgage on your house.
If you simply can’t pay the full amount of your back taxes, consider a consumer proposal. For a consumer proposal, a licensed trustee works with you to determine how much you can afford to pay each month, and then negotiates with your creditors to have the proposal accepted. A proposal becomes possible when:
- Your total debt to all creditors is less than $250,000.
- Creditors representing more than half of the dollar value of your debts agree to the deal.
When this happens, all creditors will be legally bound by the proposal.
If CRA has the controlling vote, it will probably be necessary for you and your trustee to meet with CRA to work out the terms of your proposal. CRA will require that:
- All outstanding tax returns be filed with CRA before they will accept the proposal.
- You have sufficient income to meet the payments in the proposal.
- You make installments on your current year taxes, so that you don’t fall behind on next year’s taxes.
If it is not possible to negotiate a tax debt settlement or to make an acceptable proposal to deal with your tax debts, filing bankruptcy might be the only option as it will eliminate your tax debts: upon your discharge from bankruptcy, all debts for income tax and GST are legally extinguished. However, bankruptcy is a drastic step and will seriously affect your ability to obtain credit for years afterward.
There are some special rules that deal with tax debts in bankruptcy. I recommend that you contact a bankruptcy trustee and ask him/her to review your situation and confirm that your tax liability will be discharged if you go bankrupt.
(If you have equity in your home, a consolidation loan is possible which can include tax arrears and other debts. Apply Online to find out!)
How to avoid future tax debt problems
To avoid the same problem in the future, it is important that you understand what got you into the situation you are currently in, where you owe money to Canada Revenue Agency.
If you owe taxes because you cashed in the last of your RRSP`s to pay your debts, you won’t have those tax obligations in the future – because your RRSP`s are gone.
On the other hand, if you are self-employed and do not have taxes taken off each paycheque, and then you owe money to CRA at the end of the year, you have a more fundamental problem. Your tax debts in a case of a bankruptcy can be discharged, but next year you will owe money again.
I recommend that, if you are self employed, you estimate how much you will owe for taxes, and then send one twelfth of that amount to CRA each month. That way, at the end of the year, when you file your tax return, you will have no accumulated tax debts.