What options can help you manage personal income tax debt?

Owing surprise income tax debt can be stressful. This debt may arise from self-employment income, investment gains, multiple years of unfiled returns, or a reassessment — and leave you wondering how you are going to pay what you owe. 

The Canada Revenue Agency (CRA) has broad collection powers, and can garnish wages or bank accounts, freeze funds, and register liens against property without a court order. However, there are several options available to help you deal with income tax debt. Taking action early, before enforcement begins, can help make a significant difference. 

The options below range from informal arrangements to formal debt relief solutions to help you make an informed decision about how to manage your personal income tax debt:

File all outstanding income tax returns

People often delay filing taxes because they fear the result. However, filing can stop the CRA from issuing an arbitrary assessment, which may be higher than what is owed since the CRA most likely won’t have information on your available deductions.

Filing also allows your interest and penalties to be calculated accurately and is required before most relief or settlement options are considered. Additionally, you may have a personal tax liability if you are the director of a corporation with unpaid tax debt.

Pay the balance in full

If you have the financial ability, paying the tax you owe in full is often the least costly option. Assess sources such as savings, financing, or asset liquidation to determine if you have enough to pay the balance owed. Interest compounds daily on unpaid tax balances and resolving the debt quickly reduces long-term costs.

Enter a payment arrangement with the CRA

The CRA may agree to an arrangement that allows the balance to be paid over a period of time if you are not able to pay the balance immediately. While these arrangements can be beneficial, this option is not automatic and may not be realistic for those with large debts or unstable income.

The CRA will assess your income, expenses, and assets before agreeing to a payment arrangement and missing payments can result in enforcement action. Additionally, interest will continue to accrue, and you will need to remain compliant with ongoing tax filings and payments.

Request taxpayer relief

The CRA may cancel or waive penalties and interest under its Taxpayer Relief Program in certain circumstances. This includes situations where CRA errors or delays contributed to tax debt, where financial hardship makes the payment of penalties and interest unreasonable, or in extraordinary circumstances such as serious illness or disaster. While taxpayer relief does not eliminate the principal tax debt, it can reduce the overall amount owing.

Consider a Consumer Proposal

Personal income tax debt is fully eligible to be included in a Consumer Proposal, which can be an effective option when your tax debt is significant and repayment is not realistic. A Consumer Proposal is a formal, legally binding settlement under the Bankruptcy and Insolvency Act and is administered by a Licensed Insolvency Trustee.

During the Consumer Proposal process, you offer to repay a portion of your unsecured debts, typically over a period of five years. The CRA is bound by the Consumer Proposal once accepted by the majority of your creditors and interest will stop accruing on your debt.

Explore filing a Bankruptcy

Bankruptcy may provide a fresh financial start for those with overwhelming debt and limited repayment options. Filing for Bankruptcy stops CRA collection actions immediately and creditors can’t refuse the Bankruptcy. You must meet reporting obligations and potential payments related to surplus income or asset realization during the Bankruptcy process, and your personal income tax debts will be discharged upon completion.

Take the next step

The right solution to managing your personal income tax debt depends on the size of the debt, your income, assets, and overall financial situation. However, understanding your options and taking action early are the most important factors. Speaking with a Licensed Insolvency Trustee if you are facing potential or existing income tax debt can help you evaluate your choices and move forward with confidence.