Individuals can find themselves owing money to Canada Revenue Agency (CRA) for a variety of reasons. For the 2020 tax year, many people will owe taxes as a result of receiving the Canadian Emergency Response Benefit (CERB) or funds from other government income support programs. 

While owing income tax can be a normal occurrence, it is important to address it sooner rather than later. Income tax debt can accrue interest and added penalties, and if the debt enters collections, the CRA has special powers when it comes to collecting income taxes owed. 

If you owe money to the CRA but are unable to pay your balance when it is due, there are both informal and formal debt relief options you can consider. Before any formal options such as a consumer proposal or bankruptcy can be in consideration, you should do the following: 

1. File all tax returns with the CRA. 

The CRA is much easier to deal with if you are up to date on filing your tax returns, even if you have an outstanding balance. For the CRA to figure out if and how they can best help your situation, they need to know how much is owing in total. 

If you are unsure if your taxes are up to date, hire a professional tax preparer to help you complete and file your tax returns. They are experts in this field and would be aware of possible deductions or credits eligible to you to reduce the amount of taxes you must pay.  

Once your returns are complete, even if you owe money, file them with CRA right away. CRA can assess penalties for filing your returns late, as well as interest for outstanding debt. 

2. Determine whether you can or cannot repay the debt in full. If you cannot: 

  • Prepare a budget and determine how much you can pay upfront and monthly. Arm yourself with the best information about your personal situation as you will need it when dealing with the CRA. 
  • If you owe the CRA for 2020 and you received one of the COVID-19 relief benefits from the government, then you will have until April 30, 2022 to pay your 2020 income taxes without penalty and interest. However, we recommend that you pay the 2020 debt as early as possible, even with monthly voluntary payments, so that you are not faced with this problem in April 2022. 

3. If the CRA contacts you about outstanding tax returns and income taxes, get back to them without delay.  

Do not avoid outreach from the CRA, as this will create distrust and could potentially escalate their collection efforts against you.  

4. If the CRA has not reached out to you but you know you have a tax problem, contact them first. 

Even if they have not reached out to you yet, you can contact the CRA regarding a tax problem. It is best to get ahead of the problem by starting a dialogue with an agent. 

5. Negotiate a repayment plan with the CRA.  

The CRA will negotiate repayment plans with individuals who owe income tax debt. You may be able to reach an agreement to make monthly payments to the CRA until your tax obligations are paid in full. The CRA will not negotiate a plan that results in a payment of less than 100% of the taxed owed, so be prepared to pay the full amount along with all interest and penalties accrued.  

6. Explore if you have other means of producing the amount owed: 

  • Could you borrow money from your bank through a consolidation loan, line of credit, personal unsecured loan, or even refinancing your home?  
  • Could you borrow from friends or family?  
  • Could you sell some of your assets, items, or investments* to produce the cash?  

*If you cash in RRSP’s to pay your income taxes you will generate additional taxable income, adding more taxes owing to the CRA in the current year, and you could be using money that may be protected from your creditors to pay a debt that would be discharged in a bankruptcy. 

7. Apply to CRA under the Fairness Provisions of the Income Tax Act. 

Fairness Provisions under the Income Tax Act can help you get relief by canceling and waiving penalties and interest from the CRA. In order to qualify, you will need to prove that you have extraordinary circumstances and great financial hardship, and you will still be required to pay the principal amount owing. 

8. Consider filing a consumer proposal or bankruptcy. 

If you are unsuccessful in resolving your CRA debt problems after pursuing the above options, you may want to consider a formal insolvency filing such as a proposal to creditors or a bankruptcy in order to deal with amounts owing to the CRA.  

To learn what a consumer proposal or bankruptcy will look like given your financial situation, book a free no-obligation consultation with a Grant Thornton debt professional