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.
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:
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.
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%.
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.
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.