Navigating Your Way Out of Back Taxes: Understanding the CRA’s Payment Plan
If you find yourself in a situation where you owe back taxes to the Canada Revenue Agency (CRA), it’s natural to feel overwhelmed. However, you’re not alone, and the good news is that the CRA offers a way out—a payment plan to help you settle your debt.
The Reality of Owing Back Taxes
Owing back taxes to the CRA can seem daunting. However, it’s important to understand that the CRA doesn’t negotiate reductions in your debt. They only provide certain allowances if you file for Bankruptcy or a Consumer Proposal. Failure to pay your debt can lead to serious legal or financial consequences.
The CRA has the authority to garnish your wages and redirect any federal benefits you receive, including Employment Insurance (EI), Canadian Pension Plan (CPP), and Old Age Security (OAS). But before it gets to that point, the CRA offers an alternative—the CRA payment plan.
Unraveling the CRA Payment Plan
The CRA payment plan is essentially a contract between you and the CRA. It outlines that you will repay your balance in regular installments over a specified duration.
Steps to Set Up a CRA Payment Plan
Establishing a payment plan with the CRA involves several steps:
1. Assess Your Monthly Income and Expenses
The CRA offers a personal income and expense worksheet to help you calculate your regular payments. You will be asked to provide all sources of monthly income and your household expenses. The worksheet then calculates your income, expenses, and if any income remains. This result helps you determine if you can afford the proposed payments to the CRA.
2. Evaluate Your Payment Capacity
The CRA also provides a payment arrangement calculator to estimate when you can finish paying your CRA debt and how much interest you’ll accrue. You’ll need to enter:
- Tax debt amount;
- First payment date;
- Payment frequency;
- Interest rate (5% is recommended as the default);
- Amount per payment or number of payments.
3. Contact the CRA to Establish Your Payment Plan
Reach out to the CRA to set up your payment plan. Further instructions can be found on the CRA’s website.
4. Initiate Your CRA Payment Arrangement
Simply start your payment arrangement by making your first repayment. Remember to make your payments on time. In case you’re unable to make a payment, promptly inform the CRA to avoid legal action.
Making a Partial Payment
If you can afford it, consider making a partial payment to reduce the interest on the unpaid balance.
Taxpayer Relief Provisions
Under certain circumstances, the government may provide relief from interest or penalty if you’re unable to meet your tax payments. These circumstances include:
- Extraordinary events;
- Actions of the CRA;
- Financial hardship;
- Other situations.
For example, the government granted targeted interest relief provisions to Canadians affected by the COVID-19 pandemic in February 2021.
How a Licensed Insolvency Trustee Can Assist
If you’re still struggling to make payments despite setting up a CRA payment plan, consider reaching out to a Licensed Insolvency Trustee (LIT). A LIT can assess your financial situation and suggest a suitable debt relief option. They can also assist with a Consumer Proposal or Bankruptcy.
In a Consumer Proposal, you and your LIT jointly prepare a proposal to repay your creditors. You offer to pay a specific percentage of your total debt over a set period. If your creditors agree, you can eliminate a portion of your debt, including federal income tax debt owed to the CRA.
If a Consumer Proposal isn’t successful, you can consider Bankruptcy, where you surrender your assets in exchange for debt elimination, including tax debt.
If you’re feeling overwhelmed by your debt, consider reaching out to a trusted Licensed Insolvency Trustee. You don’t have to go through this alone.
