Tax season can be a stressful time for some. While many dread doing their taxes just because of all the paperwork involved, they still have returns to look forward to, giving them a little extra in their wallets to spend or save as they want. For others, filing their taxes means finding out exactly how much they still owe the Canada Revenue Agency. Sometimes that number can be a surprise, and if you’re adding that to existing debts like credit cards or lines of credit, it can make a growing problem worse.
When people seek debt relief measures like bankruptcy, they want to know what debts they can clear. For example, if you declare bankruptcy, do you still have to pay the CRA? Debts are unsecured and can be fully discharged in a bankruptcy, including income tax and HST. In Canada, tax debts are universally dischargeable, with the exception of fraud or tax evasion cases.
How Do You Get Tax Debt in the First Place?
#1 You Work Multiple Jobs
Payroll taxes are taken off your paycheque before you get it. These payroll deductions include your income tax and employee contributions for the Canada Pension Plan (CPP) and Employment Insurance (EI).
Your income on each paycheque is annualized to determine how much income tax you pay on each cheque. In other words, you pay as if you would receive that same amount for each pay period in the year. Because tax rates get higher the more you earn, and there is a basic personal amount you can make each year on which you pay the CRA nothing, working multiple jobs can quickly lead to an amount owing rather than a refund. Too little can be deducted from each paycheque.
#2 You’re a Freelancer or Gig Worker
When you’re self-employed, including working as a freelancer or a “gig worker” (like a food courier for app-based delivery), you are responsible for filing and paying your own income taxes, in addition to making CPP payments and paying HST. HST is charged on both goods and services.
#3 You Accepted CERB Payments
Many Canadians may be facing tax bills for the first time ever in 2021. The Canada Emergency Response Benefit (CERB), which many Canadians have depended on for income during lay-offs or job loss this year, is taxable. Unlike EI payments, they are not taxed at the source. Depending on how much you earn in 2020, you may wind up owing the CRA next year.
Relief for CRA Debt
There are other ways of getting relief on income tax debt besides bankruptcy, and they are worth exploring if you do not have other significant obligations. One way is to negotiate a repayment plan directly with the CRA. This can give you more time than the deadlines they otherwise assign, at which point interest begins to accumulate. On the other hand, they are unlikely to extend your repayment period beyond a year, you must repay the entire amount of owed, and if you do not repay in the required timeframe, they can withhold benefits like child tax credits.
A consumer proposal can also be used to deal with tax debt in addition to other outstanding loans. You will need to work with licensed bankruptcy trustees to file a consumer proposal. They are the only professionals who can file a consumer proposal. With a consumer proposal, you benefit from a reduced amount owing, a longer period of time in which you can pay it back, and you put a halt to interest rates and collection actions.
At the end of April 2020, the CRA announced that it would not force households into bankruptcy if they were financially strained due to COVID-19. Where it is the majority creditor, it has instead proposed deferred payments, giving debtors time to focus on other aspects of their finances and allowing them to avoid bankruptcy. In the long run, this will likely help the CRA avoid sustaining too many losses, as bankruptcies can significantly reduce the amount of money that creditors recover.
What Happens When You Don’t Pay the CRA?
The Canada Revenue Agency has stiff penalties for those who do not pay their taxes on time. Once you miss a certain deadline, you will face interest charges as well as late payment fees. For small owing amounts, the best thing to do is pay it off as quickly as possible to avoid further charges. Even if you cannot pay what you owe, you should still be sure to file your income taxes on time to avoid facing additional penalties.
Larger amounts due are more likely to attract aggressive collection actions. The CRA has a wide range of powers to collect on amounts owing, including freezing your bank account and garnishing wages. It is always better to be proactive when you cannot afford to pay the CRA.
CRA Debt in Bankruptcy
If you cannot negotiate an acceptable payment plan with the CRA or they will not accept a consumer proposal, amounts owed to the CRA can still be included in a bankruptcy. Depending on how much you owe, whether or not you owe balances on other sources of credit, and your ability to repay, bankruptcy may in fact be the best option.
Bankruptcy isn’t always a last resort. Sometimes it’s an effective way to get out of debt that’s become impossible. If you have questions about bankruptcy, check out our FAQ page and book a consultation with a licensed bankruptcy trustee. Your first consultation is free and will be a review of your financial situation in which a professional explains the best solutions available to you right now.
It’s stressful dealing with Revenue Canada when you owe them money. It can be time-consuming and difficult to reach them during busy periods, and their letters can be confusing. If you’re having a hard time figuring out how you can deal with surprise or insurmountable income tax debt, talk to a licensed bankruptcy trustee about debt relief solutions.