The amount of tax debt that goes uncollected each year in Canada is estimated to be around $23 billion. It goes without saying that this means that each year, thousands of Canadians are struggling to pay their tax debt. Perhaps you too are finding it difficult to pay your taxes. You may be considering the consequences of not paying your tax debt. For instance, does not paying taxes affect your credit score? In some situations, your credit score will certainly be affected. In this article, we address the impact of not paying tax on your credit score, as well as its other consequences. We also share what to do if you find yourself in tax debt, and how you can go about getting tax debt relief.
Does not paying taxes affect your credit score?
Tax debts will not always appear on your credit report. It is very dependent on the type of legal action that the Canada Revenue Agency (CRA) chooses to take. Generally speaking, the CRA will keep your information private, and will not file your information to Canada’s primary credit bureaus, Equifax and TransUnion. Information is usually only provided when they are allowed to legally, and if they pursue legal action through the court. For instance, owing tax debt following your tax return will not be reported to the credit bureaus. Should you owe a significant amount of tax debt and do not try to make your repayments, the CRA will involve their collections departments. This will involve collection calls, in person visits, and letters in an effort to collect their funds. Unlike other creditors, the CRA is unrivalled in its powers to take action to collect. It will not hesitate in pursuing legal action like wage garnishment and freezing bank accounts without warning in order to collect. If the CRA wants to pursue legal action against you, it will register your debt with the Federal Court or get a judgement to confirm the amount of debt that you owe. This could be sought in order to register a lien or to seize your assets. This makes the information public, and it will also reflect on the legal section of your credit report. A CRA judgement will stay on your credit report for six to seven years from the date of filing. This can impact your ability to secure a mortgage or a large loan, as most lenders will ask you to provide proof of your taxes being current.
Which other factors affect your credit score?
Your credit score is essentially a measure of how trustworthy you are with credit. It is a leading factor in your overall financial health, and is often the first port of call of lenders when assessing whether or not to agree to a loan or credit card, for example. Although CRA judgements can have an impact on your credit score, there are a number of other factors that will also affect your score:
- Credit history – assesses how good you are at paying your bills on time. Missed, partial, or late payments will have a negative effect on your credit report. If you use a credit card and make your repayments in full each month, you will have a better credit score than somebody without a credit history on a new credit card.
- Credit utilization – this is a guide of how much credit you are able to take out versus the amount you are using. If you repeatedly max out your credit card, you will have a lower credit score than somebody who does not often use their credit card.
- Credit product variety – provided you pay your bills on time, different types of credit can have a positive effect on your credit score.
How does tax debt impact your finances?
If you fail to pay your taxes in full when they are due, you will face interest and penalties. The CRA also have unrivalled powers compared to other creditors, and they will take the actions within their power to collect the tax debt they are owed. These actions include pursuing a wage garnishment against you, freezing your bank account, or seizing your property to sell for funds to go towards your debt repayments. You can also expect to forgo any money owed to you by another government agency, as this too will likely be used to offset your tax debt. In order to avoid having serious consequences on your finances, it is important to pay your taxes on time to avoid incurring tax debt. There are a few steps you can take to try and keep your taxes in order:
- Know what to expect when it comes to your taxes – this is simple to calculate if you filed a tax return last year
- Set aside money each pay cheque for the government when you file or when your payments are owed
- Have a separate bank account for tax funds if you are self-employed or own your own business – you can link this to the CRA’s website so it is simple to pay your taxes when they are owed
What should you do if you owe tax debt?
Firstly, do not panic. No matter how bad you may think your situation is, there is always a solution. At Spergel, we have been helping Canadians gain debt relief for over thirty years, and we are here to help you too. You may want to create a budget and see if it is possible for you to repay your tax debt in full. If not, there are a number of options you can take.
Request a payment arrangement
If it is not possible for you to pay your tax debt in full, you can request a payment arrangement with the CRA. It is best to communicate clearly with the CRA when you are struggling to make your payments. They are more likely to help if they know in advance, and there is less chance of severe consequences. Call the CRA to see if you can make a payment arrangement. They may agree to allow you to make reduced payments including interest, and they may let you stretch out your payments over time until you are able to pay off your tax debt in full.
Apply for taxpayer relief
You may be eligible for taxpayer relief with the CRA, whereby any interest and penalties you incur may be cleared. Despite this relief, you will still need to repay your tax debt in full, but there will not be further penalties or interest on this amount if you are eligible.
Voluntary disclosure program
You may owe tax because you did not file for a previous tax return, or indeed filed an incorrect tax return. In this instance, you may be eligible for a voluntary disclosure program. This gives you another chance to file a corrected tax return. Doing so can reduce the amount you owe in penalties and interest.
Speak to a Licensed Insolvency Trustee
Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This makes them the best port of call when you are struggling with debt. Tax debt is particularly sensitive given the powers of the CRA and the potential consequences. For this reason, it is important to act quickly. At Spergel, we have helped over 100,000 Canadians to gain debt relief, including tax debt. We can clear your unsecured debt for good, and offer immediate protection from your creditors, including the CRA. There are two primary ways of achieving this:
Filing a consumer proposal
A consumer proposal is a popular bankruptcy alternative that can reduce your debt by up to 80%. It is ideal for Canadians who wish the reduce their debt while keeping their assets. It is essentially a legal form of debt settlement filed with the help of a Licensed Insolvency Trustee. You will determine an affordable monthly repayment amount, which your trustee will then negotiate with your creditors on your behalf. Most creditors are likely to accept as they will generally reclaim more of their owed repayments via a consumer proposal than through bankruptcy. Once agreed, you will then be committed to making these monthly payments on time in return for the clearance of your debt, including tax debt. A stay of proceedings offers protection from your creditors, which means the CRA can no longer contact you or threaten you with legal action.
Filing bankruptcy
Bankruptcy is able to clear most forms of debt. It is the legal process of assigning any non-exempt assets you may have over to a Licensed Insolvency Trustee in exchange for the clearance of your debt. Once you are discharged from bankruptcy, your debts are cleared for good. It is the best option for those struggling to repay a significant amount of tax debt, or for those who do not have assets to lose. While bankruptcy will clear most tax debts, it cannot remove a tax lien. Learn more about the advantages of filing bankruptcy.
If you need support with your tax debt, or want to know more on ‘does not paying taxes affect your credit score?’, book a free consultation today. If you are struggling with your debt, tax or otherwise, you will likely need a Licensed Insolvency Trustee to help you to gain tax debt relief. All our trustees treat each individual with compassion and understanding, and we want to put you on your journey to a fresh financial future. Reach out today – you owe it to yourself.