What happens if I owe tax debt to the CRA?

Finding out that you owe a large amount of money to the Canada Revenue Agency (CRA) can cause a great deal of stress. Many people wonder what the CRA can do, whether the situation is already out of control, and what options — if any — are available to resolve the debt.

You are not alone if you owe the CRA a considerable amount of money. Additionally, there are established processes and legal options available to help you handle your tax debt in a structured and manageable way. Let’s discuss what happens when you owe money to the CRA and explore the options to take back control of your financial future.

Why is CRA debt different than other types of debt?

Federal legislation gives the CRA a wide range of collection powers if your taxes remain unpaid. The CRA can take steps such as garnishing wages, freezing bank accounts, applying tax refunds or government benefits to the balance, or registering a lien against property.

This means that CRA debt often escalates more quickly than people expect. The balance owing can increase even if no taxes are being added as interest and penalties continue to accrue. However, the CRA’s focus is on collecting what is owed — and not on punishing taxpayers. This means there are options available when payment in full is not realistic.

Why filing your tax returns is crucial

One of the first and most important steps when you owe a significant amount of money to the CRA is to ensure that all your outstanding tax returns are filed. The CRA cannot confirm the full amount you owe or discuss resolution options until your returns are up to date.

While many people delay filing because they are worried about confirmed the balance owing, this often makes the situation worse. Filing your returns allows you to understand your debt situation and allows you to address this debt properly.

What happens if you can’t pay the CRA?

The solution will depend on your income, assets, overall debt, and whether CRA collection has already started if you owe the CRA a large amount of money and cannot pay it in full.

These formal and informal solutions can help you pay back your debt to the CRA:

Payment arrangement with the CRA

A payment arrangement with the CRA may be appropriate in some cases. This option allows you to repay the balance over time and is based on your ability to pay. While interest typically continues, the CRA will often pause collection action as long as the arrangement is being honoured.

Relief from penalties and interest

The CRA may also consider relief from penalties and interest in situations involving financial hardship. While this does not reduce your underlying tax debt, it can make repayment more manageable in specific situations.

Filing a Consumer Proposal

A Consumer Proposal, or Division I Proposal, is a formal, legal process administered by a Licensed Insolvency Trustee (LIT). Your CRA tax debt can be negotiated and reduce rather than repaid in full through a Consumer Proposal.

The amount of the reduction is not fixed and depends upon your unique financial circumstances, including your income, assets, family obligations, and overall debt. The CRA will consider whether the Consumer Proposal provides a better outcome than Bankruptcy before deciding whether to accept it.

Once your Consumer Proposal is filed, CRA collection actions are required to stop — including wage garnishments and frozen bank accounts. The interest on the included debt will be frozen.

Filing for Bankruptcy

Bankruptcy is another federal process administered by an LIT. CRA debt is discharged and written off subject to the standard rules under the Bankruptcy and Insolvency Act in a personal Bankruptcy.

This means that once you are discharged from Bankruptcy, you are no longer legally required to repay the CRA debt included in the Bankruptcy. CRA collection actions stop when a Bankruptcy is filed, as with a Consumer Proposal.

While Bankruptcy is not the right solution for everyone, it provides a complete and permanent resolution to CRA tax debt — particularly in situations where repayment is not feasible.

What about corporate CRA debt and director liability?

CRA debt can raise additional concerns for business owners. While corporate tax debt belongs to the corporation, directors can be held personally liable for certain types of CRA obligations. This most commonly includes unremitted payroll source deductions and GST/HST in some cases.

This means that the CRA may still pursue directors personally for these amounts, even if a corporation is no longer operating. Director liability is a complex subject and depends on the timing, actions taken by the CRA, and whether proper steps were taken by the director.

It is crucial to seek advice early to understand your potential exposure and the options available to address it if you are a director of a corporation with CRA debt.

Take the next steps

While many people avoid addressing CRA debt, ignoring CRA correspondence or hoping the issue will resolve itself often leads to higher balances and more aggressive collection action. It is important to remember that owing the CRA a large amount of money does not mean you have failed. It means you are dealing with a financial issue that can be addressed with the right information and support.

If you owe money to the CRA and are unsure of what to do next, speaking with an LIT can help you understand your options and regain control of your finances.