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I owe taxes but can’t pay: what to do

Posted on 12 September 2023

Written by Chris Galea

Tax season can be stressful – even more so if you discover you owe money, and will not be receiving a refund. Owing taxes to the Canadian government can be a daunting situation, and it can happen to anyone. Whether you’re facing unexpected financial challenges or simply underestimated your tax liability, it is really important to address the situation responsibly, and as quickly as you can. The Canada Revenue Agency (CRA) understands that people can find themselves in this predicament, and they have options in place to help individuals who owe taxes but are unable to pay them all at once. There are options available to you if you are unsure if you can pay, from substantially reducing your tax debt to eliminating it completely. In this article, we will explore the steps you can take if you find yourself in this situation. So, if you are thinking ‘I owe taxes but can’t pay’, we will share what to do in this scenario.

Why do some people owe taxes while others get a refund?

Canadians who get a tax refund have paid more income tax than they need to in the past year. The most common way to get a refund is through accessing tax credits – for instance, child care or post-secondary education. People who owe taxes have, on the contrary, not paid enough income tax. This can often happen to people who are self employed or freelancers. As they are not considered employees, their employer does not have to make all the deductions necessary for a full-time employee. This means they need to budget in order to pay off tax from their earnings each year. Some individuals do not receive a refund, nor owe any money. This is because they have paid exactly the right amount of income tax for the year.

What if you owe money and do not pay your taxes?

In this scenario, the CRA will make three attempts by phone to collect the amount of tax owed. If they have no luck in making contact, the CRA will then issue a written warning about the amount that is owed and why. If the taxes are left unpaid, the CRA will start legal action within 90 days of mailing the notice of assessment. Once legal action has begun, the CRA can proceed in collecting money from you in several ways, including: 

  • Wage garnishment – having your paycheque deducted at source via your employer, with any funds going towards repayment of your tax debt.
  • Freezing your bank account – stopping you from gaining access to your funds until your debts are repaid in full, and seizing funds to go towards your tax debt.
  • Placing a lien on your home – this pledges your property as collateral on your tax debt, putting it at risk should you not repay your tax debt in full.
  • Seizing and selling your assets – seizing assets like your vehicle or valuables to be sold, with any proceeds going towards your tax debt.

What to do if you cannot pay your taxes

There are a few actions we recommend taking if you are thinking ‘I owe taxes but can’t pay’:

Stay calm and tackle the issue

Firstly, there is no need to panic – no matter how bad you think your financial situation may be, at Spergel we can always offer help and support. We have helped over 100,000 Canadians gain debt relief, and so we have likely seen circumstances far more serious than yours. Secondly, you should not ignore the problem. Ignoring your tax obligations can lead to increased penalties from the CRA, interest charges, and legal action by the CRA. It is essential to take immediate action to address your tax debt, even if you are unable to pay the full amount right away.

Contact the CRA

The next step is to reach out to the CRA as soon as possible. Keep in mind that interest compounds daily at the rate set by law, until you pay the amount you owe in full. The agency is more likely to work with you if you are proactive about addressing your tax debt. You can contact them by phone or through your My Account on the CRA website. Explain your situation honestly and ask for guidance on how to proceed. The CRA has a dedicated team that deals with taxpayers facing financial difficulties and can provide you with options to resolve your tax debt. It may allow you to pay your tax debt in instalments.

File your taxes anyway

Even if you cannot pay your tax debt, you should file your tax return on time. Not filing is generally punished:

  • You will need to pay a 5% increase on anything owed for filing a return past May 1st
  • You will pay an additional 1% for each additional month after that
  • Not filing within the calendar year will limit your ability to gain government benefits

Negotiate a payment plan

One of the most common solutions for individuals who are unable to pay their tax debt in full is to negotiate a payment plan with the CRA. The agency may agree to a monthly payment arrangement that suits your financial situation. Be prepared to provide information about your income, expenses, and assets to determine the appropriate payment amount and schedule. Keep in mind that interest will continue to accrue on the unpaid balance until it is fully paid, but this option can help you to avoid more severe penalties and legal actions.

Apply for taxpayer relief

In certain cases, the CRA may grant taxpayer relief if you can demonstrate that you are facing financial hardship or other exceptional circumstances. This relief can include waiving or reducing penalties and interest charges. To apply for taxpayer relief, you will need to complete and submit a formal request to the CRA, explaining your situation in detail. While approval is not guaranteed, it is worth exploring this option if you believe you have a valid case.

Consider borrowing or refinancing

If you are not able to secure a payment plan with the CRA or are concerned about the high interest charges, you may want to explore borrowing or refinancing options. You can consider taking out a personal loan, using a credit card, or refinancing your mortgage to pay off your tax debt. Be cautious with this approach, as it may involve higher interest rates or fees, and you should weigh the costs against the benefits.

Speak to a Licensed Insolvency Trustee for tax debt help

Tax matters can be complex, and it is often beneficial to seek professional advice. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. Our expert Licensed Insolvency Trustees at Spergel will review your financial circumstances, offer guidance and advice, and help you to navigate the best course of action. We can explore your debt relief options if necessary, help you to negotiate payment plans, and apply for taxpayer relief.

Can you appeal the amount of tax debt owed?

It is possible to file an appeal for the amount of tax debt you owe if you feel it is inaccurate. You have a year and 90 days to apply for an appeal for income tax and GST/HST, starting from the date of confirmation, reassessment, or redetermination. To appeal, you must submit a Notice of Appeal on the Tax Court of Canada website. If you are planning on appealing, it is a good idea to get a Licensed Insolvency Trustee or tax lawyer involved – someone who understands how to deal with the CRA. You should also ensure that all your taxes are filed and current, and that you are within the deadline for an appeal. There is, of course, no guarantee that you will be successful in your appeal, so be prepared for the worst. If you are unsuccessful, it may be good to explore debt relief options like bankruptcy or a consumer proposal to substantially reduce or eliminate your tax debt altogether.

When is tax due?

Usually, you must file your tax return and pay any tax debt you owe by April 30. If you are self-employed, you have an extension on your deadline – instead, this is June 15.

If you are thinking ‘I owe taxes but can’t pay’, you are likely worried about what to do next. Owing taxes in Canada but struggling financially can be stressful, but it is important to address the issue to avoid further problems. Book a free consultation with a Licensed Insolvency Trustee at Spergel if you are worried – we can offer professional advice and help you to gain debt relief for a fresh financial future, free from tax debt.

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Chris Galea

Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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