Tax season is stressful. It's even more stressful if you find out you owe money and won't be getting a refund. There are lots of reasons someone might owe money and many times it's not too serious. For many people that owe the amount is small and easily manageable.
But if the amount you owe is large and you can't afford to pay it right now what should you do? It's a tough scenario to find yourself in, but there are options available to you.
People who get a tax refund have paid more income tax than they need to during the past year. The most common way that people get a refund is through accessing tax credits. Some common examples of tax credits are for child care, post-secondary education and training to help someone gain experience for their workplace. A full list of all available tax credits can be seen on the Canada Revenue Agency's (CRA) website.
People who OWE money have not paid enough income tax. This can often happen to people who do freelance or gig work. As freelancers and gig workers do not qualify as full employees their employer does not have to make all the deductions necessary for a full-time employee. As a result gig workers and freelancers must budget in order to pay off tax from their earnings each year. You may also have outstanding debt from COVID-19 overpayments from programs such as CERB.
Some people do not receive any refund, nor do they owe any money. These people have paid exactly the right amount of income tax for the year and are not entitled to a refund but neither do they owe any money.
If you fail to pay your taxes the CRA will make three attempts by phone to collect amounts owed. If the calls do not work, the CRA will then issue a written warning about what is owed. If the taxes remain outstanding, the CRA will start legal action within 90 days of mailing the assessment or reassessment notice.
The CRA will never ask you to send money or pay by means of pre-paid cards, gift cards, etc. These types of emails and text messages are scams.
Once it has commenced legal action the CRA will not usually withdraw it. It can also proceed in collecting money from you in a variety of ways, including:
Yes, it is possible to file an appeal for the amount you owe. You have one year and 90 days to apply for an appeal for income tax and GST/HST, starting from the date of confirmation, reassessment, or redetermination.
In order to appeal, you must submit a Notice of Appeal on the Tax Court of Canada website.
When appealing your taxes you should hire a lawyer who knows how to deal with CRA. This comes at a cost for their services. You must also consider the following:
The one thing that is certain is there is no guarantee of success or how successful you will be. Often if you are successful there will still be something owing.
You must file your tax return and pay any outstanding balance due by April 30. You must also have paid any tax debt balance by that date as well.
The deadline is different though if you or your spouse or common-law partner are self-employed. In that case you normally have until June 15, but because that is a Saturday the deadline has been extended to June 17, 2023. Keep in mind that the CRA still begins assessing interest as of April 30.
The CRA offers many flexible options for people to pay their taxes.
You can do it online with a variety of different methods. One is through your online banking. You can also use CRA My Payment and pay with Interac Debit, Visa Debit, or Debit Mastercard. You can also your credit card, debit card, PayPal, or make an Interac e-Transfer. You can also make a wire transfer as well.
You can also pay through the mail with cheque and money order.
It's even possible for you to pay in person. You can do this through your bank Canadian bank or credit union using a printed personalized remittance voucher.
You can even pay at a Canada Post location using cash or debit. A full list of ways to pay, and accepted payment methods for each can be found on the CRA's website.
If you can’t pay your taxes the CRA may withhold tax credits as a means of recovering the outstanding tax debt. This can mean forgoing GST/HST tax credits, the climate action incentive payment, and other tax credits until the CRA has recovered the amount owed.
Realizing that you can't afford you tax bill can be shocking and incredibly stressful to think about. The good news is that enough people have been in your shoes to create a bit of a playbook.
Even if you can’t pay all or part of what you owe to the CRA, you must file your tax return on time. Not filing is penalized harshly:
Contact the CRA to work out a payment plan. If you're unable to pay in full right away, the CRA will allow you to pay your debt in instalments instead of all at once in a lump sum. You can set up a repayment plan either online or over the phone.
If, after starting your repayment plan, your circumstances change and you can no longer afford the plan, you MUST contact the CRA to come up with a solution. If you don't the CRA will proceed with legal actions to collect the outstanding funds you owe.
Remember the CRA has the ability to garnish wages, pensions, and other benefits. If you don’t feel comfortable negotiating with the CRA, speak to a Licensed Insolvency Trustee (LIT). An LIT will review your debt situation and help you decide how to resolve your tax debt.
Add up your assets, income, and liabilities to get a better idea of your current financial responsibilities. What, if anything, can you de-prioritize to free up money to pay your taxes? This is a strong guide to follow.
If you haven’t already, consider creating an emergency fund for unexpected expenses like a tax bill. While you’re at it, ask yourself what else you might need to add or remove from your budget. Have any of your financial goals changed in recent years?
One way to do this is to join the ‘gig economy.’ Finding a few smaller contract jobs to increase your cash flow at the start of the year is a solid way to pay off your tax debt and put some money towards your savings. If it works well with your lifestyle, you could even try doing gig work full-time.
If you're able to, perhaps look for part-time work close to home. A few hours a week can really add up over time.
If you own a house with a spare room, you can consider renting it out on Airbnb to pick up some extra money.
You can also services to people that you know. Babysitting, tutoring or even offering to walk someone's dog in the morning for a fee.
You should reach out when you feel overwhelmed by your tax debt or you’re afraid your taxes will push you over the limit of what you can handle. If you’re there, a Licensed Insolvency Trustee can take you through your finances, outline your debt relief options, and help you get your tax debt in order.
Are you worried that you won't be able to pay the taxes? Contact a BDO Licensed Insolvency Trustee for a free consultation.