If you have outstanding income tax debt with the Canada Revenue Agency (CRA), you should take action to deal with the amount owing sooner than later. The government can hit you with penalties and high rates of interest on taxes owed. Luckily, there are options available to help you deal with this debt.
How does someone acquire income tax debt?
Typically there are three common ways that an individual acquires income tax debt.
- You have multiple sources of income which can place you in an inaccurate tax bracket. When this is the case, each income source takes off enough tax to reflect the tax bracket that they would be in if that was their only income source. However, with the combined income, you are actually in a higher tax bracket, so, therefore, neither source is deducting enough taxes from the cheques, so you are left with a payable at the end of the year.
- You are self-employed and thought ‘cash received equalled income’. This mainly occurs when you are not properly calculating how much to remit to the government and you end up owing money at the end of the year.
- You don’t file your taxes at all. The biggest mistake you can make is neglecting to file your taxes year after year, letting costs build up to insurmountable amounts. Frequently, the penalties and interest you are charged for not paying your taxes become as much as the tax amount owing.
Fortunately, you have options to help address your tax debts. Those options include:
- Negotiate payment terms with CRA. You may be able to explain your financial situation to CRA and try to negotiate a payment plan. For example, if you owe $1,000, you may offer to pay $100 per month for the next ten months. But, even if the CRA accepts your payment arrangement, you will continue to be charged penalties and interest until your debt is paid in full. Even if you come to an arrangement with CRA, they have the ability to rescind or modify this arrangement. If you’re unable to successfully negotiate terms, the CRA may withhold tax refunds and GST credits, garnish your wages or accounts receivables, take funds from your bank account, and even place a lien on your home or other real property
- More formal options. Filing a consumer proposal with a licensed insolvency trustee will stop both collection action and interest and penalties. Normally a proposal is for less than 100% of the debt you owe, however, CRA has specific criteria regarding proposals. Another option is declaring personal bankruptcy. It’s a common misconception that personal income tax debt is not discharged by bankruptcy. In fact, personal income taxes are covered by bankruptcy.
Avoiding income tax debt in the future
To avoid any issues surrounding income tax debt, it’s best to be organized when it comes to your taxes.
- The best thing you can do is to file your taxes on time. This way you will avoid any penalties and interest if you do end up owing CRA money. It’s also important to be aware of the filing deadlines and which one applies to you. While most individual income tax returns are due at the end of April, self-employed persons have an extended deadline of June 15th.
- File any returns for years that you have missed. This will help you reduce any further penalties and interest for those tax years.
- If you aren’t comfortable preparing your taxes, or you get overwhelmed at tax time, seek help from a professional. Accountants and tax preparers will be able to help you understand the process, find all applicable deductions and give you sound professional advice.
- Most people that owe income taxes are self-employed or own a small business. If this is the case, consider seeking the help of a bookkeeper to keep you on track going forward.
- If you do owe money to the CRA, make your payments on time and in full to avoid any further penalties and interest.
If you are struggling with income tax debt and aren’t sure about the best way to proceed, meet with a Grant Thornton debt professional for a free, confidential consultation to learn more about your options.