income tax debt

If you’re struggling to pay your income tax debt, the best thing you can do is to get professional help and find a solution as quickly as possible.

Acting fast is key when it comes to your tax debt.

The Canada Revenue Agency has very broad collection powers relative to other unsecured creditors. If you’re in arrears, the CRA can:

  • Freeze your bank account;
  • Garnish your wages (if you are employed);
  • Contact your customers to garnishee payments (if you are self-employed); and
  • Register a lien against your home.

All this without even having to obtain a court order!

So not only should the CRA be the first creditor you make efforts to pay, but you should be swift in making the proper arrangements to get yourself out of arrears.

Here are 4 possible solutions that can help you get relief from your CRA debt.

And remember, before embarking on any of them, you should file all previous outstanding tax returns so you know exactly how much you owe the CRA. For consumer proposals and bankruptcies, this is actually a required step.

#1. You can negotiate a repayment plan with the CRA.

This solution is ideal if you owe a relatively small amount in back taxes. By contacting your income tax collections officer and explaining your financial situation, you may be able to work out a plan to pay the CRA back over time.

The pros:

  • You have more time to repay your debt.

The cons:

  • The CRA will likely not extend the repayment period beyond one year.
  • Interest and penalties will be added to your debt during this time.
  • You must repay the entire amount owed.
  • If you fail to repay within the required timeframe, the CRA may withhold your HST or child tax credits, as well as pursue any other collection methods (including those listed above) against you.

#2. You can obtain a loan to pay off your CRA debt.

This is an option only if you’re a candidate for such a loan. You’ll need to have a steady income, decent credit, and a co-signer or an asset that can secure the loan.

The pros:

  • You can extend repayment beyond one year.
  • A loan minimally impacts your credit rating as compared to insolvency.

The cons:

  • Depending on your financial situation, any unforeseen twists and turns life throws your way may cause you to default on the loan. This may include job loss, reduced income, divorce, or unexpected expenses, such as major car or home repairs.
  • If you default, the bank will pursue your co-signer.
  • If you default, you may lose the asset that secured your loan, such as your car or home.

#3. You can file a consumer proposal.

In order to file a consumer proposal, you will need the assistance of a Licensed Insolvency Trustee. These are the only professionals authorized – and regulated – by the Office of the Superintendent of Bankruptcy to assist you with consumer proposals and bankruptcies.

Your trustee helps you figure out what you can afford to pay each month based on your financial circumstances. He or she then negotiates with your creditors on your behalf to reach a compromise on the amount to be repaid. Because income tax debt is unsecured, it can be included in the proposal.

Keep in mind that you will need the majority in dollar value of your creditors to approve the proposal for it to be binding on all creditors. And if the CRA is your largest creditor and has the controlling vote, you’ll need to work directly with them to reach agreement on the terms of your proposal.

The pros:

  • Filing a proposal immediately stops collection efforts by the CRA or others against you. This includes ceasing garnishments and lifting any freeze on your bank account.
  • You end up paying back less than the full amount owed.

The cons:

  • If the CRA registered a lien against your home, the taxes become a secured debt and are not dischargeable.
  • A consumer proposal will have a negative impact on your credit history and may impact your future ability to get credit.
  • If you default, your proposal becomes annulled and your creditors may again pursue collection efforts against you.

#4. You can file for bankruptcy.

Income tax debt is unsecured, and thus can be discharged on completion of a personal bankruptcy. As mentioned above, in order to file bankruptcy, you will need the assistance of a trustee.

The pros:

  • Filing for bankruptcy immediately stops collection efforts by the CRA or others against you. This includes ceasing garnishments and lifting any freeze on your bank account.
  • Once your bankruptcy is completed, your income tax and other unsecured debts will be extinguished.
  • If you are self-employed, HST and unpaid source deductions are also extinguished (although the latter ranks first against your non-exempt assets).

The cons:

  • If your personal tax debts amount to more than $200,000 and represent more than 75% of your total unsecured debt, you’ll need to attend a formal discharge hearing before a Registrar in Bankruptcy. The Registrar has the powers of a judge and will decide the conditions of your discharge.
    • The Registrar may decide you must pay back a portion of the debt.
    • The Registrar may refuse discharge. (This is reserved for extraordinary circumstances.)
  • Even if your debt is less than $200,000, the CRA may oppose your discharge and require you to pay additional funds.
  • If the CRA registered a lien against your home, the taxes become a secured debt and are not discharged in bankruptcy. If you want to keep your house, you must arrange for payments to the CRA.
  • Of all debt resolution methods, bankruptcy will have the most impact on your credit rating and may affect your ability to obtain future credit.

Keep in mind that any income taxes, HST, and source deduction debts arising post-bankruptcy must be paid.

A Licensed Insolvency Trustee can help you resolve your income tax debt.

If you’re having financial difficulties that are stopping you from paying your income tax debt, you should contact a trustee immediately. We’ll review your financial situation and advise you on the options you have available to you and their pros and cons, so you can make the right choice for you and your family. Get the fresh start you deserve. Contact us today.