Dealing with income tax debt is a challenge for many Canadians. Owing income tax debt to the Canada Revenue Agency (CRA) can feel overwhelming, and an unexpected tax bill can add further strain to your finances. If you’re unable to meet the CRA’s payment deadline, interest charges and late fees can quickly increase your balance—and your stress.
No matter how overwhelming tax debt can be, it’s important to remember you aren’t alone, and solutions are available. Let’s start by understanding why you have income tax debt, its consequences, and the options available to resolve it.
Why do I have tax debt?
From a career change to withdrawing from your RRSP, tax debt can happen for a variety of reasons—and it can be surprisingly easy to get into. Common situations that might lead to unexpected income tax debt include:
- Earning income from multiple sources, resulting in incorrect tax amounts being withheld.
- Switching jobs partway through the year.
- Receiving government benefits in error (such as CERB) and being asked to repay them.
- Being self-employed and not setting aside enough for taxes.
- Withdrawing funds from your RRSP.
- Receiving a lump sum of money, like a pension payout, without tax withholdings.
- Drawing pension income without sufficient tax withholdings.
- Failing to file taxes in previous years.
What happens if I don't pay my tax debt?
The CRA is a powerful creditor with unique debt-collection privileges. If you owe tax debt, it’s important to understand the collection actions the CRA could take against you.
- Withhold your tax returns and GST/HST. One of the CRA's first collection steps is to keep any money it owes you, whether it’s keeping your tax returns, rebates, or GST/HST cheques.
- Garnish your wages. The CRA can require your employer (or anyone else who owes you money) to send a portion of your income directly to the CRA to pay down your debt. This method, known as wage garnishment, can significantly reduce your take-home pay.
- Register a judgment against your assets. The CRA can obtain a court judgment against assets such as your home for the amount you owe. A judgment can prevent you from selling or refinancing your home until you pay the debt. If you don’t pay, the CRA can seize and sell property to settle the debt.
- Hold other people liable for your debt. The CRA can make other people liable for your tax debt if you transfer assets or give gifts while you owe tax. The CRA may issue a “Notice of Assessment” under section 160 of the Income Tax Act, which allows it to pursue collection action to recover the debt.
What can I do about my tax debt?
If you owe money to the CRA and can’t pay your balance in full, you still have both informal and formal debt-relief options.
Negotiate with the CRA
Start by making sure your tax filings are up to date. The CRA is more willing to negotiate payment terms when it sees you’ve been diligent about filing your tax returns—even if you have an outstanding balance.
Next, take a close look at your finances to see whether you can repay the debt in full. Create a basic budget to determine how much you can afford to pay upfront and each month. Even if you can’t repay the debt in full, knowing where you stand is important.
Once you've gained a clear understanding of your financial situation, you can approach the CRA to discuss potential payment arrangements. Keep in mind that the CRA's goal is to recover the full amount owed, so be prepared to present a plan that leads to full payment of your tax debt, including all interest and penalties.
Fairness Provisions of the Income Tax Act
In certain circumstances, you may be eligible for relief from penalties and interest under the Fairness Provisions of the Income Tax Act. To qualify, you must show that extraordinary circumstances and financial hardship prevented you from making your tax payments. Even if you qualify for relief, you’re still required to pay the principal amount you owe.
Formal debt relief
Only a Licensed Insolvency Trustee (LIT) can help relieve your tax debt. An LIT will walk you through all your options and help you determine if a consumer proposal or bankruptcy is the best choice to get you a fresh start. Formal debt relief solutions have helped countless Canadians manage, reduce, or eliminate their debt—including tax debt.
In addition to tax debt, virtually all types of consumer debt, such as credit card debt, personal loans, and payday loans, can be included in a consumer proposal or bankruptcy. Filing a consumer proposal or bankruptcy will also stop collection activity, interest payments, and penalties.
How to avoid tax debt in the future
The number one thing you can do to avoid tax debt in the future is to file your taxes by your deadline—April 30 for most individuals and June 15 if you’re self-employed. If you’re able, paying on time and in full will help you avoid CRA penalties and interest. You should also keep your taxes up to date by filing any returns you’ve missed, which can reduce further penalties and interest for those tax years.
It’s also important to know when to ask for help. If you feel stressed about an outstanding balance with the CRA, a Licensed Insolvency Trustee can help. By understanding all options available to you, you can feel confident in your decision to step into a fresh start.