Tax debt can feel like a heavy burden, but with the right approach and resources, it is possible to navigate through it and regain financial stability. Anyone can need support with tax debt – especially if you’re facing an overwhelming bill and the possibility of added interest and penalties from the Canada Revenue Agency (CRA). Whether you’re a freelancer, a small business owner, or facing personal tax debt, you likely owe some tax debt to the CRA. For many Canadians, unpaid taxes can be the most challenging kind of debt to handle. It can be difficult to pay off in one go, and can quickly accumulate over the years, be it HST, RRSP or RRIF withdrawals, and even the Canada Emergency Response Benefit (CERB). In this guide, we share how to pay off tax debt in Canada via a number of effective strategies.
Why is owing tax debt a concern?
The CRA is probably the most intimidating creditor you can have. Unlike other creditors, they are unrivalled in their collection powers, and can often act quickly and without prior warning. Unlike other creditors, they do not need a court order in order to act on their collections. Here are some of the CRA’s collection powers:
- Pursuing a wage garnishment, meaning your income is reduced at source via your employer
- Seizing money in your bank account
- Freezing your bank account
- Withholding any tax credits you are due
- Charging you interest and penalties
- Placing a lien on your property
Despite the collection powers of the CRA, there are solutions to help you gain tax debt relief. There are two legal forms of debt that can officially stop the actions of the CRA via a stay of proceedings and reduce or eliminate your tax debt entirely. Having helped over 100,000 Canadians to gain debt relief, at Spergel, we can also help you to eliminate penalties and interest that you may have incurred on your tax debt.
How to pay off tax debt in Canada
If you have a hefty amount of tax debt and do not know where to begin when it comes to paying it off, firstly don’t panic. No matter how bad you might think your financial circumstances are, there is always a solution. There are a few steps we recommend you take:
- Understand your debt – the first step in addressing your tax debt is to fully understand how much you owe and why. Request a statement of account from the CRA to get a detailed look at your tax debt, including principal amounts, interest, and any penalties. Knowing exactly what you’re dealing with is crucial for planning your next steps.
- Communicate with the CRA – avoiding the CRA can lead to increased penalties and interest, making your situation worse. Contact them as soon as you realize you can’t pay your debt in full. The CRA is often willing to work with taxpayers to find a solution, especially if you can demonstrate financial hardship.
- Consider a payment arrangement – a payment arrangement is an agreement with the CRA to pay your debt over time. You’ll need to provide detailed financial information to the CRA to negotiate a payment plan that reflects your ability to pay. Often they’ll give you up to a year provided you can pay your taxes in full. It’s important to make these payments on time to avoid further penalties.
- Request taxpayer relief – if you are facing considerable financial hardship or extenuating circumstances, it’s possible to make a fairness application to the CRA to request them to reduce or eliminate the interest and penalties associated with your tax debt. Do note that you may need the support of a Licensed Insolvency Trustee when completing your application, as you need to create a compelling argument for them to waive your penalties and interest.
If you don’t think you can afford to pay your taxes in full, you likely need a form of tax debt relief, which we’ll cover in the next part of this article. Unfortunately, the CRA is unlikely to make a deal with you directly to pay less than the full amount owing, which is where you may need additional support from a Licensed Insolvency Trustee.
What if you can’t pay off your tax debt?
If you don’t think a repayment plan or even relief on your tax-related interest and penalties will help ease your tax debt, you likely need a form of debt relief. Your first port of call should be an experienced Licensed Insolvency Trustee. They are the only professionals in Canada legally able to file all forms of debt relief. A reputable Licensed Insolvency Trustee will review your financial circumstances in detail, before working with you to choose the best pathway to a fresh financial future for you. Here are the most common pathways to reducing or eliminating your debt completely:
- Filing a consumer proposal – a consumer proposal is the only form of legal debt settlement in Canada. It is formal negotiation that takes place between your Licensed Insolvency Trustee and your creditors. Your trustee will work with you to understand an affordable and manageable monthly repayment figure that your creditors will reasonably accept. It’s Canada’s most popular bankruptcy alternative, and can reduce your unsecured debts by up to 80%. Other advantages of a consumer proposal include the ability to keep your assets, and full protection from creditors. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.
- Filing bankruptcy – bankruptcy in Canada is the process of assigning any non-exempt assets you have over to your Licensed Insolvency Trustee in exchange for clearance of your unsecured debts. They will then be sold, with any proceeds going towards the money owed to your creditors. When cleared of debt, bankruptcy is the best way to gain a fresh financial future. Although many Canadians think that bankruptcy leaves you with nothing, this is far from the reality – each province has its own list of bankruptcy exemptions to enable you to keep essential items you may need to live and work, including a vehicle beneath a certain threshold.
Navigating tax debt can be incredibly complicated, and so often it is best to see the professional help of a Licensed Insolvency Trustee. At Spergel, we have been helping Canadians to reduce and clear their tax debt for over 34 years. We can help you to understand your options, work with the CRA on your behalf, and even work to negotiate better terms for the repayment of your tax debts.
How to pay off tax debt in Canada: FAQs
Here are some of the most common questions we receive about how to pay off tax debt in Canada:
Can tax debt be forgiven in Canada?
In Canada, tax debt can be forgiven or relieved under specific conditions through programs and provisions by the CRA. These include the Taxpayer Relief Provisions, which allow for the cancellation of penalties and interest due to extraordinary circumstances; the Voluntary Disclosures Program, offering a way to correct past tax errors without penalty, though taxes owed must still be paid; and debt relief options including consumer proposals and bankruptcy, where tax debts may be reduced or cleared altogether. Additionally, an Offer in Compromise can be negotiated in cases of severe financial hardship, enabling taxpayers to settle debts for less than the full amount owed. While not forgiveness, payment arrangements can also provide relief by spreading the debt over time, easing the financial burden. Taxpayers are encouraged to consult with Licensed Insolvency Trustees and communicate with the CRA to navigate these options and find the best path to managing or reducing their tax debts.
How do you pay if you owe taxes in Canada?
If you owe taxes in Canada, there are several methods to make your payment to the CRA. You can pay online using your financial institution’s internet banking service, through the CRA’s My Payment service, or by using a third-party service provider that allows you to pay with a credit card or PayPal. Additionally, you can pay in person with cash or debit at any Canada Post outlet, though a fee may apply, and you must have a QR code to do so. For those who prefer traditional methods, sending a cheque or money order by mail is also an option. It’s important to ensure that all payments are made payable to the “Receiver General for Canada” and include relevant identification information to ensure the payment is applied to your tax account correctly.
How do I clear my CRA debt?
Clearing your debt with the CRA involves several steps, starting with understanding the total amount owed by reviewing your account balance through the CRA’s online services. Once you know the amount, you can pay the debt in full using various methods such as online banking, the CRA’s My Payment service, or in-person at Canada Post outlets. If you’re unable to pay the full amount immediately, you might be eligible for a payment arrangement to pay over time. In certain cases, you could apply for relief from penalties and interest under the Taxpayer Relief Provisions if extraordinary circumstances have prevented you from meeting your tax obligations. It’s also advisable to communicate directly with the CRA to discuss your situation and explore all available options.
Are taxes forgiven after 10 years in Canada?
In Canada, taxes are not automatically forgiven after 10 years. The CRA has a robust system to collect taxes owed, and there is no statute of limitations on collecting tax debt once an assessment or reassessment has been issued. However, the CRA does have discretion under the Taxpayer Relief Provisions to waive or cancel penalties and interest in specific circumstances, such as extraordinary circumstances, inability to pay due to financial hardship, or actions of the CRA contributing to the delay. While these provisions may provide some relief from additional charges on the principal amount owed, they do not lead to the automatic forgiveness of the principal tax debt itself. Taxpayers seeking relief or facing challenges in paying their taxes should directly contact the CRA to explore available options, such as payment arrangements or consideration for taxpayer relief.
What happens if you owe back taxes in Canada?
If you owe back taxes in Canada, the CRA will first send you a Notice of Assessment or Reassessment indicating the amount owed. Failure to pay this amount by the due date results in interest charges on the outstanding balance, calculated daily. The CRA may also apply penalties for late payments, further increasing the amount owed. If the debt remains unpaid, the CRA has the authority to take stronger collection actions, such as garnishing wages, seizing assets, or placing a lien on your property. To avoid these consequences, it’s important to act promptly by either paying the amount in full or contacting the CRA to arrange a payment plan. The CRA is often willing to work with taxpayers to establish manageable payment arrangements and may provide relief from penalties or interest in certain circumstances under their Taxpayer Relief Provisions. Engaging with the CRA directly or seeking advice from a Licensed Insolvency Trustee can help navigate the process of resolving back taxes and mitigating potential legal and financial impacts.
At Spergel, we understand the stress and anxiety that tax debt can cause. Our team is dedicated to helping Canadians navigate their way out of tax debt with compassionate, professional advice and solutions tailored to your unique situation, no matter which type of CRA tax you owe. If you’re struggling with tax debt, don’t wait – reach out to us today for a free consultation and take the first step towards reclaiming your financial stability.