Tax Debt Relief Canada: Resolve Tax Debts and Penalties

Owing money on tax debt in Canada can quickly become a problem. The longer you take to pay your tax debt, the worse the situation becomes.

This guide explains how the Canada Revenue Agency (CRA) collects outstanding debt, discusses the myth of CRA debt forgiveness, and what CRA tax debt relief is available.

What is tax debt?

Tax debt is money owed to the Canada Revenue Agency (CRA), such as personal income tax debt, source deductions, HST owed from self-employment and cashed-out RRSPs.

Tax debts accumulate interest, penalties and charges. The best-case scenario is that you arrange a payment plan with the Canada Revenue Agency, but other options are available.

How does the CRA collect money?

The Canada Revenue Agency (CRA) is a formidable creditor, and they are difficult to negotiate with. The government tasks them with recovering unpaid personal income tax, HST, employment deductions, student loan debt, and benefit overpayments.

Under legislation such as the Income Tax Act and the Excise Tax Act, the CRA has the power to collect outstanding tax debts in various ways.

If you owe the CRA money, penalties and interest are applied to the unpaid account, and they will enforce collection action.

They have the power to garnish your wages, freeze your bank account, seize your assets and register a lien on your property.

When seeking tax debt relief, you must act quickly before they can take action against you. The good news is that there is tax debt help available.

Tax debt relief options

If you need tax relief, there are many tax debt resolutions available, depending on your financial situation.

Let’s look at how to deal with tax debt in Canada.

Arrange a tax repayment plan with the CRA

The first way to deal with outstanding CRA debt is to arrange a tax repayment plan directly. You make monthly payments over an agreed period until you have repaid the entire amount owed, including penalties and interest.

To persuade the CRA to agree to such an arrangement, you must be able to make a compelling argument. A tax payment plan in Canada can typically be spread out over a year.

Use a consolidation loan to repay your tax debt

If you cannot afford a payment arrangement, you could borrow money and consolidate tax debt in the form of a debt consolidation loan.

By combining your debts into one loan, a debt consolidation loan enables you to lower your interest rate and total monthly payments.

However, this might not be possible if you have poor credit. Even if you are approved, you might pay a higher interest rate, which could make your situation worse.

Request for Taxpayer Relief

In addition to a tax repayment plan, you might be able to waive interest and any penalties under certain circumstances.

A Request for Taxpayer Relief, also known as a CRA fairness application, cancels any penalties and interest, but you still need to pay the original debt.

You must have a legitimate reason to be granted this relief, such as financial hardship, serious illness, actions by the CRA, or some other extraordinary circumstances.

You must provide evidence to support your request for relief, such as proof of income and expenses.

File a consumer proposal

A consumer proposal provides tax debt relief by reducing your debt and combining all of your unsecured debts into one simple monthly payment.

It is the only debt relief program that the CRA will accept.

CRA collection actions will stop, such as wage garnishments, frozen bank accounts and property liens. Interest is frozen, and you might be able to reduce your debt. Upon completion, you are debt free.

You can include other debts in a consumer proposal, such as credit cards and loans. Secured debts, such as mortgages and car loans, cannot be included.

You must use a Licensed Insolvency Trustee to file a consumer proposal, and you must file all outstanding tax returns beforehand.

If you file a consumer proposal, the CRA is willing to settle your unpaid tax debt, but they may request specific conditions. They may also examine the sources of your financial issues, your payment history, and your previous interactions with them.

Declare bankruptcy

As a last resort, bankruptcy can also stop action from the CRA and eliminate your tax debts.

Before filing for bankruptcy or a consumer proposal, you must file all outstanding tax returns so that the CRA knows how much you owe.

Consult a Licensed Insolvency Trustee for tax debt relief

If you can’t pay your tax debt, a Licensed Insolvency Trustee can immediately stop CRA collections.

A Stay of Proceedings gives you immediate protection from all your creditors, including the CRA. Collection calls and wage garnishments stop, and any property liens are removed.

Only a Licensed Insolvency Trustee has the power to administer bankruptcy and consumer proposals to deal with CRA debts.

Am I responsible for my spouse’s tax debt in Canada?

You do not inherit a spouse’s tax debt, even while married or divorced, but the CRA can register a lien on a shared property. Your spouse must pay their tax debt in full before a lien can be removed. You can sell the property, but the CRA must be paid from the proceeds of the sale.

As a lien on your property is effectively a secured debt, you cannot eliminate your CRA debts through bankruptcy or a consumer proposal once this happens.

Get tax debt relief today

Owing tax debts are a serious matter. You must act right away to avoid further legal action. Talk with a Licensed Insolvency Trustee about the best way to resolve your outstanding tax debts.

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