Refunds, Tips & Advice, What To Know After You File

How to Manage Debts if You Owe Back Taxes

During the height of the COVID-19 pandemic, the Canada Revenue Agency (CRA) suspended certain activities—including the collection of tax debt owed. However, this suspension didn’t make the tax debt go away. Taxes in Canada still accrued, but the CRA simply wasn’t sending out collection notices so as not to harm financially-vulnerable Canadians struggling with COVID’s impact (both on their personal finances and the economy).

In September of 2020, the CRA reinstated its collections activities. With Canada’s tax season in full swing (filing deadline is April 30 for most and June 15 for those who are self-employed, as well as their spouses), many people who missed making payments are now wondering: “What do I do if I owe the CRA money?”

Paying tax bills in a timely fashion is important, but what should you do if you owe the CRA a particularly large amount of back taxes and can’t afford to pay? Is there a recourse for Canadians who have been impacted by COVID and need help paying taxes? What happens if you don’t pay the CRA what you owe?

What about the COVID-19 emergency relief and recovery benefits that you may have received? Will those affect your taxes owed to the CRA? Let’s find out!

COVID-19 Emergency/Recovery Benefits and Taxes in Canada

Like many other Canadians, you may have applied for and received COVID-19 emergency or recovery benefits, such as:

  • Canada Emergency Response Benefit (CERB);
  • Canada Emergency Student Benefit (CESB);
  • Canada Recovery Benefit (CRB);
  • Canada Recovery Caregiving Benefit (CRCB);
  • Canada Recovery Sickness Benefit (CRSB);
  • Employment Insurance (EI) Benefits; and/or
  • Other provincial or territorial emergency benefits.

If you received any of these benefits, then you need to report these benefits and their amounts to the CRA on your income tax and benefit return. This is important for accurately estimating your taxes owed—and it can help you qualify for special programs like interest relief.

What to Do if I Owe the CRA a Lot of Money

Ideally, if you owe the CRA money, you would simply make a payment in full and not have to worry about it further. However, many Canadians may face difficulties making payments to the CRA. Whether it’s due to financial struggles caused by the pandemic or other issues, it’s important to take prompt action.

1. File Your Taxes Quickly—Even if You Can’t Pay in Full

One of the most important things to do if you owe the CRA money is to complete your tax return as quickly as possible. Even if you cannot make your payment in full, completing your taxes can help you avoid late filing penalties. Free tax software can help with this if you need assistance with filing.

This can also be useful for checking exactly how much you will owe the CRA in taxes for the year (in addition to any other outstanding payments owed).

2. Check the CRA’s Payment Arrangement Calculator

How much do you owe? How much can you afford to pay? What are your existing monthly expenses versus your income? Establishing all of these facts prior to contacting the CRA can help you save some time and make arranging an alternative payment plan simpler.

To this end, it can be helpful to check the CRA’s Payment Arrangement Calculator (PAC) and their Monthly Net Income and Expense Worksheet (referred to as “the worksheet”). Using these tools, you can calculate some different payment arrangements with the CRA that can help you either pay off your taxes faster (minimizing interest) or spread the payments out in a way that minimizes your financial burden.

Filling out the PAC will require several pieces of information, including:

  • How much you owe
  • Date of first payment
  • Frequency of payments
  • The interest rate for these back taxes

The worksheet that accompanies the PAC requires all of your monthly income information, including employment, bonuses, and other benefits.

3. Contact the CRA

After completing your taxes and checking the PAC to try to come up with a payment arrangement that works for you, it’s important to reach out to the CRA directly. From there, you can work with the CRA to establish a payment arrangement that will help you resolve the amount you owe.

Please note that, even if you do have a payment arrangement in place, the CRA may be able to take some money out of your benefits or credits to cover money owed—so it’s important to ask if/how the CRA plans to do that. This way, you can take these benefits garnishments into account when planning your monthly budget.

Also, if something happens that impacts your ability to make payments, it’s important to contact the CRA quickly and notify them of the situation. This can help you avoid future problems by modifying your payment plan as needed.

What You Can Do if You Can’t Pay Your Taxes?

Despite our best efforts, sometimes we just can’t make ends meet; which might be the case for many Canadians—especially those who are dealing with a tax bill for the very first time due to income support benefits received in 2020, like CERB. 

The good news is that if you owe taxes for 2020, you have until April 30, 2022 to pay, interest-free, if you received some form of income support in 2020 (like CERB, CRB, EI, etc.) and earned less than $75,000 in taxable income throughout 2020. The best thing anyone can do if they owe taxes for 2020 and qualify for these tax payment extensions is to establish a payment plan as soon as possible. This way, by the time April 2022 rolls around, they would have paid off any taxes you owed, and taken full advantage of the interest-free period. 

1. Work with the CRA If You Can

If you owe the CRA money, it’s best to contact them as soon as possible so you can explain your financial situation and find a solution that works best for you. The faster you do this, the more likely it is that the CRA will be able to work with you to create a fair payment plan that takes your needs into account.

2. Contact a Non-Profit Credit Counselling Agency

If you need help managing your income, expenses and bills so you can pay off any taxes you might owe, you can always reach out to a not-for-profit credit counselling agency, like Credit Canada for free help and advice. Certified Credit Counsellors can take a look at your budget, and give you all your options for paying off any taxes you might owe, while explaining the pros and cons of each option. Plus, sometimes it’s easier to have an unbiased expert on your side to sift through all the information for you, and provide you with clear next steps on how to pay off your taxes and achieve other financial goals. All counselling services are free when you work with a non-profit credit counselling agency.

What Happens if You Don’t Pay or Make Arrangements?

So, what happens if you don’t pay your taxes owed or make arrangements to resolve them? The CRA may take specific steps and legal actions to reclaim the money owed. 

1. Initial Contact from the CRA

The first thing the CRA will do before starting any legal action is to try to reach you. They are required to:

  1. Make one “attempt to give verbal legal warning” by phone; and
  2. Send one “written legal warning letter.”

Note that these communications should never contain “threatening” language. Specifically, CRA communication guidelines state that they will never “use aggressive language or threaten to arrest or deport you.” If you receive a phone call or mail message using these threats, it’s most likely a scam and you should contact a CRA representative and visit antifraudcentre.ca to report the incident.

Additionally, the CRA does not use text messages or instant messaging apps to communicate with taxpayers. So, any messages on these channels about taxes owed or asking for payment are likely scams and should be reported.

2. Garnishment of Wages

One action the CRA might take if you owe taxes is that they may garnish your wages. They do this by issuing a document called a “requirement to pay” (RTP) to a third-party that owes you money or is holding funds for you. This can include your employer, another individual, or a bank.

Any funds that get redirected to the CRA are applied to your outstanding fees/taxes until the entire balance is finally repaid.

When this practice is applied to your government benefits, this garnishment is called a “set-off” which can be issued even if you have a payment arrangement in place with the CRA.

3. Issue Asset Liens/Seizures

In certain extreme cases, the CRA may attempt to issue asset liens and seizures. With a lien on your belongings (which could include your residence), the CRA can collect money from the proceeds of the sale—as they will be given “creditor” priority in the event of a sale.

It should be noted that this is an extreme measure, and is less common than simple wage garnishment—especially if you communicate with the CRA and resolve to make payment arrangements.

You can click here to learn more about what can happen if you don’t pay your taxes.

Be Prompt, Remain Calm and Get Help If You Need It 

Whether you like doing your taxes early, or you put it off until the very last minute, we all have to do them, regardless! So it’s best to make the process as easy and painless as possible, and get whatever support you need to get it done right. Thankfully, there are lots of resources available that can help, and if you owe, free help and support is just a phone call away.

 

Special Thanks

Special thanks to Credit Canada for this post.