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Can’t pay your taxes?

Gail Johnson
Pay Day
The Canada Revenue Agency headquarters in Ottawa is shown on Friday, November 4, 2011. THE CANADIAN PRESS/Sean Kilpatrick

The only thing worse than finding out you owe taxes is not being able to pay them. The good news is there are things you can do to address the situation. Just remember: you can run, but you can’t hide.

“If you don’t take steps to resolve your unpaid taxes, the CRA [Canada Revenue Agency] can take legal action against you,” says chartered professional accountant Robin Taub, a subject-matter expert with the nonprofit Investor Education Fund.

That legal action could include garnisheeing your income or your bank account (meaning that some or all of your wages could go straight to the CRA) or even seizing and selling your assets to settle your tax bill. The federal agency could also withhold family benefits such as GST/HST credits.

Contact the CRA

If you’re pretty sure you won’t be able to pay the full amount owing on time, contact the CRA pronto.

“Even if you can’t pay all of the taxes you owe, you should still file your return on time to avoid any late-filing penalties,” Taub adds.

The amount of the penalty will depend on several factors, including how late the payment or return is, how much is owed, and whether you’ve been late with a payment or return in the past.

To pay your bill, you may need to borrow money from friends or family, from your credit line, or even via a home-equity loan.

Set up a financial plan

If you’re still short, you may be able to work out a plan with the CRA to pay your taxes.

“If you can show the CRA that you have reasonably tried to get the money and you still can’t pay your balance in full, you can request a payment arrangement,” Taub says. “This is a plan to help you pay your taxes. But you’ll be charged daily compound interest on any unpaid balance [starting May 1] until you pay it in full.”

The CRA sets the interest rate on a quarterly basis. The current interest rate is 5 per cent.

Offer a schedule that’s realistic. If you owe $1,000, for example, offer to pay $100 per month for the next 10 months.

In 2010, approximately 296,000 payment arrangements were made with taxpayers who were unable to pay their taxes.

To set up a payment plan, you can:

  • call the CRA Debt Management Call Center at 1-888-863-8657
  • call 1-866-256-1147 to make a TeleArrangement
  • go to the CRA Web site (www.cra.gc.ca) and create a pre-authorized debit plan using “My Account”

Another approach is to file for a consumer proposal, in which a bankruptcy trustee works with you to determine how much you can afford to pay each month then negotiates with your creditors to have the proposal accepted.

According to Bankruptcy Canada, the CRA will require that all outstanding tax returns be filed before it accepts the proposal, you have enough income to meet the payments, and you make installments on taxes owing for the current year so that you don’t fall behind on any taxes owing next year.

Taxpayer relief

In some cases, the CRA may cancel or waive interest and/or penalties on unpaid taxes. These instances include:

  • Losing your job or suffering some other kind of severe financial hardship.
  • Facing extreme circumstances beyond your control including disasters like fires and floods; a serious physical or mental illness; an accident; or a death in the family.
  • Disruptions in communication such as a postal strike.
  • When the CRA has made an error in processing or providing tax information.

You’ll need to complete Form RC 4288 to apply for relief within 10 years of the tax owing. As well, you must provide all of the reasons the charges should be cancelled or waived and present all relevant supporting documents and information.

Thinking ahead to next year

“To avoid ending up in a situation where you can’t pay all of the taxes you owe, make sure that the correct amount of tax is being withheld at the source if you’re an employee,” Taub says. “If you’re self-employed, make sure that you’re making the correct installments” throughout the year.