Tax Debt Solutions : Dealing With Tax Debt in Canada
As soon as the calendar turns to April, financial anxiety in people also starts to roar.
April is the time to do your taxes which is not a very scary or complicated thing.
But the procedure can differ for people who may have defaulted on taxes the previous year, or for those who may not have paid their taxes for a few consecutive years.
The procedure for tax filing for self-employed individuals, small businesses, or unemployed individuals is also a lot different than salaried people.
If you are struggling to pay taxes to the Canada Revenue Agency (CRA), here are a few things you must know.
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What is income tax debt?
There may be several reasons why people do not pay their taxes on time.
All of this unpaid income tax qualifies for income tax debt.
The accumulated taxes that you do not pay are added to your debt ratio.
While dealing with the CRA can seem a bit daunting, there are a few steps you can take to repay your tax debt.
Remember that the CRA can keep your HST and child tax credits.
They can also seize your assets, money, freeze your bank accounts, or cost you your job.
Unfiled taxes like PST and GST payroll taxes can also double up the longer you delay paying them.
There is no way to evade your taxes.
So, it is crucial to adopt of these steps and repay your taxes as soon as you can.
How can you repay your income tax debt?
In order to pay your income tax debt, you need to have a thorough understanding of your current debt.
You can start by filling your outstanding tax return forms.
This may seem intimidating if you have a lot of debt to your name, but this will also bring a clear picture in front of you so you can act accordingly.
You need to also revisit and review your past returns to compare and evaluate your total tax due.
Wherever you find an opportunity to cut your outstanding debt, make use of it.
Another major thing to note here is the reason for your past tax defaults.
For most people the grounds for not paying taxes include a natural calamity, a critical illness or accident, unemployment, serious personal problems, etc.
See if you qualify for tax relief provisions.
You may receive interest waivers in some situations.
But you may also have to pay a penalty or high interest in other cases.
Find out which one of these applies to you.
After you have assessed these details, you can proceed to one of these options to solve your income tax debt problem.
Discuss and Bargain Payment Conditions with the CRA
The other option that lies ahead of you is to negotiate with the CRA.
Some people may find it difficult to pay taxes up front but are likely to come through if the payment is broken down to a schedule.
You can always reach out to an income tax collections officer and work out a payment condition that suits you.
Explaining the reasons for your inability to pay taxes in the past can be a good way to start your correspondence with the tax officer.
You can also offer post-dated checks to establish truth and credibility.
The CRA is likely to accept your request for a well thought of and practical schedule, but it is still extremely necessary to abide by the plan and not miss the payments in between.
You must also remember that you need to complete the schedule and pay back every tax dollar you owe.
The ideal duration of a payment is usually up to a year.
You will be charged interest on your debt during this duration.
However, you must know that the CRA has the authority to accept or reject your request.
They can also register a lien or notice against your properties and other assets if they wish.
Apply for a Loan to Repay Your Tax Debt
One of the most convenient options to pay off your tax debt is by applying for a loan.
However, you do need a stable source of income and a decent credit score to be eligible for this option.
In some cases, if you lack either of these prerequisites, you can opt to apply for a loan with a co-signer.
You can also consider signing a collateral or security to secure a loan.
However, you must carefully evaluate this option before going forward with it.
Firstly, a loan may sound like the end to all your monetary problems but it still predominantly remains another form of debt.
For someone already struggling with paying back debt, getting stuck in the monthly drills of paying back loan installments can be a daunting task.
Secondly, depending on the loan amount and tenure, a loan is a long term liability.
If you quit your job or lose it for numerous reasons, you will lose your ability to settle the loan.
Things also get tricky in case of co-signers and collaterals.
If the co-signer is a spouse, an event like divorce can come in the way of the process.
Moreover, if you are unable to pay back the loan, you will also end up losing the signed asset.
Filing a Consumer Proposal
Last but not the least, filing a consumer proposal can be another great solution to income tax debt.
A consumer proposal is an agreement between you and the CRA where you agree to pay the tax that you can afford.
Under the proposal, you offer to pay the CRA and your creditors less than the amount that you actually owe them.
This includes not just your income tax debt but also other debts like your credit card bills too.
The proposal contains information on all your assets, funds, debts, income sources, etc.
All of these are first verified by the licensed insolvency trustee.
Only defaulters with a debt value of less than $250,000 are eligible to file a consumer proposal.
Defaulters with a debt amount higher than $250,000 can choose to file a commercial proposal under Division I.
Although both the proposals work in the same manner, the commercial proposal follows a more detailed form and procedure.
Another essential rule to note is that is it mandatory that unsecured creditors equivalent to more than 50% the dollar value of your debt should agree and accept your consumer proposal.
So they are far likely to accept it than any other solution to pay your debt.
When you file a consumer proposal, the CRA unfreezes your bank accounts.
In some cases, you may owe more than 50% of your debt to the CRA.
In such scenarios, the CRA will be the one to accept or reject your consumer proposal.
However, the outstanding income tax returns are filed before the CRA agrees to accept your consumer proposal.
To sum it up
While these solutions may help you in your hour need after defaulting on income tax, the advisable thing would always be to file your income tax returns every year without any delays.