Understanding the 4 Common Causes of Tax Debt (and What to Do if You Can’t Pay)
Tax debt can be a considerable stressor, especially when you’re unable to pay off the balance. It’s a situation faced by thousands of Canadians every year. Understanding the common causes of tax debt can help you take the right steps to avoid it. But what if you are already in this predicament? There are solutions, and we are here to guide you through them.
1. Dipping into Your Retirement Savings
The Issue with Withdrawing RRSPs
RRSPs—Registered Retirement Savings Plans—are attractive investment options due to the tax benefits associated with them. When you contribute to your RRSPs, the amounts are deductible from your income, often resulting in a tax refund. However, the situation changes when you withdraw from your RRSPs.
When you make a withdrawal, the funds become part of your taxable income, which can lead to a potential tax debt. The financial institution usually withholds a base level of income tax, depending on the amount you’re withdrawing. However, the tax deductions upon withdrawal may not always cover what you owe based on your tax bracket, resulting in a lower-than-expected amount from your after-tax RRSP withdrawal.
Tip: If you’re planning to withdraw from an RRSP, consider setting some of the money aside for possible tax payments.
Think Before Using RRSPs to Clear Debt
Before you use your RRSPs to pay off debt, consult a Licensed Insolvency Trustee. They can guide you on how to protect your assets while dealing with your debts.
2. Juggling Multiple Jobs
The Tax Implications of Multiple Jobs
If you’re working multiple jobs, the taxes deducted from each paycheque may not be sufficient to cover your combined tax bill. This is because tax rates increase as your earnings do. If each employer deducts tax based on a salary of X, and your total income is 1.5-2X, you’re likely to owe tax at the end of the year.
Tip: Consider discussing your total income with your employer and request them to withhold more tax from each paycheque. If you overpay, you’ll receive a tax refund.
3. The Challenges of Self-Employment
Tax Compliance for Self-Employed Individuals
In Canada, it’s relatively easy to start a self-employed venture. However, there’s no compulsory tax compliance course, meaning that many business owners learn the hard way that the government requires compliance, whether or not an individual knows the tax rules.
As a self-employed individual, you’re responsible for remitting CPP, EI, and income tax payments to the Canada Revenue Agency (CRA) on your earnings. If you usually make a lump sum payment to CRA, you might need to make installment payments throughout the year. If you miss an installment, you’ll be charged interest.
Tip: If you’re not good with paperwork, consider hiring a bookkeeper or accountant to manage your taxes.
4. Handling GST Payments
The Role of GST in Tax Debt
If you’re self-employed and earning more than $30,000 in revenue each year, you’re required to register with CRA, obtain a GST number, file GST returns, and make remittances. However, some business owners get into trouble because they miss GST filing deadlines or don’t have the funds to remit to CRA.
GST that a business charges and collects is considered a “trust” amount, meaning that you’re holding the money in trust for CRA. If you fail to remit this amount, interest and penalties compound daily, exacerbating your tax debt.
Tip: Resist the urge to use collected GST when business is slow. CRA can employ aggressive collection tactics for this debt.
Solutions for Tax Debt
If you owe money to CRA for income taxes, GST, payroll, or other balances, and you can’t pay in full or on time, it’s crucial to take action before the situation escalates further. Consult a Licensed Insolvency Trustee for guidance on handling government debt.
One solution is to file a Consumer Proposal with the help of a Licensed Insolvency Trustee. A Consumer Proposal can effectively write off most debts, including government debts and general consumer debts, and can stop all collection action.
For more information about Consumer Proposals and other legal debt solutions, contact a local Licensed Insolvency Trustee in your area. You can also book a free debt consultation to help you plan your way out of debt.
Remember, understanding the common causes of tax debt and acting promptly if you can’t pay can save you from a lot of stress and financial hardship.
