For most of us, finding out you owe a tax debt can be unnerving, particularly if you don’t have the money to pay it. It is, after all, owed to the government, and the government knows a lot about us. Tax debts are not like credit card debts. The government didn’t loan you the money — you owe the money because of a calculation set out in the Income Tax Act or other taxation laws. So, what happens if you don’t pay the amount the government is asking for?
Most individual taxpayers prepare their tax returns in the spring and file them with the Canada Revenue Agency (CRA) to meet statutory obligations. Your tax preparer may be the one to break the bad news that you owe money. From the government’s point of view, the tax was already owed when you earned the income, but it doesn’t become due and payable until April 30 of the following year (with some exceptions).
If you don’t pay the tax you owe by April 30, CRA will charge interest on the debt. If you also fail to file your tax return by April 30 (extended to June 15 for self-employed individuals), you may face monthly late-filing penalties. These penalties are meant to motivate taxpayers to file and pay on time.
CRA will send you an assessment notice advising you how much tax you owe and how to pay it. Traditionally, these notices have been sent by mail, but they are also available on the CRA My Account portal for those who have access.
If you don’t pay the outstanding tax balance on time and don’t appeal the assessment, you’ll receive collection notices. If you cannot pay the full balance, you can contact CRA to arrange installment payments. In addition to making payments on arrears, you may also need to maintain quarterly tax installment payments.
If you are self-employed or have income from sources without tax deducted at the source, you may be required to make quarterly tax installment payments. CRA will send you notices when these payments are due — typically June 15, September 15, December 15, and March 15.
Each installment payment is roughly one-quarter of the tax you owed on either last year’s tax return or the year before. CRA assumes your income will be similar in the current year, and these payments ensure the tax you owe is paid. If you fail to make the requested payments on time and in full — and end up owing tax when you file — CRA may charge you interest on the missed installment.
If you have tax arrears and don’t pay the full balance, CRA may automatically offset future refunds or credits you may be entitled to. This can include the Goods and Services Tax Credit (GSTC), Canada Carbon Rebate (CCR), and other federal or provincial rebates and credits. The Canada Child Benefit (CCB) is usually unaffected unless the debt specifically relates to a CCB overpayment.
If your tax debt remains sizable, your file may be transferred to a CRA collections officer who will call you to discuss payment. CRA expects taxpayers to borrow funds or rearrange their financial affairs to pay the tax balance in full as soon as possible.
If this is not possible, the collections officer may agree to a payment plan. However, failing to meet the terms of the payment agreement could result in CRA taking legal action to collect the debt.
If you fail to pay a credit card balance, the credit card company cannot garnishee your wages or bank account without first obtaining a court judgement against you. This process takes time and provides you with an opportunity to defend yourself in court.
CRA, however, is not bound by such procedural limitations. If you owe tax and fail to follow a payment agreement, CRA may issue a Requirement to Pay (RTP) to any person or business that owes you money. Upon receiving the RTP, the recipient must send the specified amount to CRA.
For banks, this means sending all funds in your account(s) to CRA, up to the amount owed. In some cases, this may include certain types of investments held with the bank. Until the tax debt is fully paid or CRA withdraws the RTP, your account may become unusable. Any new deposits will be sent to CRA instead of being available for your personal use.
If your employer receives an RTP, they may be required to send 30 percent of your gross wages to CRA each payday. For self-employed individuals, CRA could seize 100 percent of accounts receivable. Unless you can prove to your CRA collections officer that the RTP is causing undue hardship, CRA will likely keep it in place until the debt is paid in full.
CRA may place liens on your assets, seize them, and sell them to recover unpaid taxes. Without prior notice, CRA may request a federal court judgement against you, which can then be registered against your assets.
For vehicles, CRA may register a lien in the provincial Personal Property Security Registry (PPSR). If you attempt to sell the vehicle, potential buyers will see the lien and may refuse to purchase it until the debt is cleared.
For real property, CRA may register a lien against your home, cottage, or land — similar to a mortgage. While CRA has the legal right to seize and sell a taxpayer’s primary residence, its policy is not to do so. However, this does not apply to secondary properties, such as cottages, which can be seized.
Once CRA registers a lien against real property, filing for Bankruptcy does not remove it. The lien remains on the title like a mortgage, and interest on the debt continues to accrue.
CRA has collection rights that most creditors do not. Many people assume this means they are stuck paying tax debts in full with no relief options. However, there are ways to manage tax debt.
A taxpayer may submit a request under taxpayer relief provisions to have penalties or interest waived. This is only successful if there were extenuating circumstances that prevented timely filing or payment. CRA rarely reduces the principal tax amount, so additional options may be necessary.
The Bankruptcy and Insolvency Act supersedes the Income Tax Act, meaning individuals can seek relief from most tax debts if they cannot make the payments CRA expects. One option is a Consumer Proposal, a government-regulated debt settlement that allows for reduced, interest-free payments over time. The settlement amount is usually less than the full balance owed.
CRA can vote to accept or reject a Consumer Proposal, but if other creditors vote in favour, CRA must comply with the majority decision. If CRA rejects the proposal or if financial circumstances are particularly dire, filing for Bankruptcy may be necessary. Filing for either a Consumer Proposal or Bankruptcy prevents CRA from taking further legal action and forces them to participate in the insolvency process.
To learn more about tax debt relief options, such as a Consumer Proposal or Bankruptcy, contact a Licensed Insolvency Trustee at MNP for a free consultation.
Wes Cowan is a Licensed Insolvency Trustee at MNP Ltd, and a former CRA Collections Officer and Auditor.
CIRP, LIT
Senior Vice-President
Servicing: Waterloo, Cambridge, Kitchener, Stratford, Tillsonburg, Guelph, Listowel, Owen Sound
2024-12-17
Consumer Proposal
Navigating personal Bankruptcy is challenging enough, but the complexity increases significantly when you’re also a shareholder or director of a corporation.
2024-08-19
Consumer Proposal
What is surplus income and how does it impact your Bankruptcy filing?
