Dealing with debt

How to pay off tax debt

Stop debt in its tracks and get relief now

Do you need help with tax debt?

For many Canadians, unpaid taxes can be the hardest debt to deal with. Tax debt can be hard to pay off all at once and can accumulate over the years. HST for the self-employed, RRSP and RRIF withdrawals and, this year, the Canada Emergency Response Benefit (CERB) can all result in a hefty tax bill.

Why is tax debt so stressful?

The Canada Revenue Agency or CRA can be an intimidating creditor. They have many different means of collecting the tax debt you owe them.

The CRA can:

  • Withhold tax credits
  • Seize money in your bank account
  • Garnish your wages, and
  • Charge you interest and penalties

Concerned woman filing taxesDealing with the CRA can be intimidating but remember that tax debts are no different than other type of debt. There are solutions.

What can I do to repay my income tax debt?

Get a clear picture of what you owe

The first step is to get on top of your tax situation by completing and submitting all outstanding tax returns. It might seem overwhelming, but once you see exactly what you owe, you will be better prepared to figure out how to manage your debt.

Communicate with the CRA

Once you have a clear idea of how much tax debt you owe, contact the CRA and establish a payment schedule that you can afford. The CRA will charge interest on the remaining balance at a rate of 5%.

Should you get a loan to pay your tax debt?

The CRA encourages taxpayers to either reduce their expenses or borrow funds to pay off their tax debt. But should you consider going into more debt to pay off your tax debt? The CRA charges 5% on late payments (plus penalties), which may cost less than what most lenders can offer you. Try to avoid paying off tax debt with a high-interest loan as it can create more financial problems later on.

Apply for taxpayer relief

If you can’t pay your tax debt due to events beyond your control, like a serious illness, natural disaster or loss of employment, you may apply for tax relief and see if you qualify to have penalties or interest cancelled or waived. You may also need to engage the services of a tax lawyer to assist you with this application.

What if I can’t afford to repay my tax debt?

If you can’t afford to repay your current debt, you have options available for debt relief. The first step would be to schedule a free consultation with a Licensed Insolvency Trustee (LIT). An LIT can help you explore all your debt relief options, from debt consolidation and debt management plans to formal debt forgiveness programs.

An LIT can help with two specific types of debt relief:

Reviewing bills

Reducing tax debt through consumer proposal

It may be possible to negotiate with the CRA about the amount of tax you owe by filing a consumer proposal.

A consumer proposal is a legal form of debt forgiveness, sanctioned by the Bankruptcy and Insolvency Act, that provides protection from your creditors, lawsuits or wage garnishments.

In a consumer proposal, an LIT reduces your unsecured debts (credit card, line of credit, tax debt.) to a significantly lesser amount by negotiating with your creditors. You can expect to pay back 30–80% of your debts.

Eliminating tax debt by filing bankruptcy

Eliminating tax debt by filing bankruptcy

If you can’t pay your tax debt to the government, you might consider filing for bankruptcy. There are many advantages and consequences to filing for bankruptcy.

There are many differences between a consumer proposal and bankruptcy. But both debt forgiveness programs reduce or eliminate unsecured debts, including tax debt. An LIT can help you understand if this solution makes sense for you.