Should I Pay Off My Taxes With A Personal Loan?
We probably do not need to tell you this, but failing to pay your Canadian taxes can cause a whole lot of problems for you and the interest the Canadian Revenue Agency (CRA) charges on that balance is just the beginning.
No matter what caused this situation, it is important to deal with it right away. Do not – we repeat – do not delay in paying the CRA! The CRA’s collections department has the power to issue wage garnishments, freeze and seize bank accounts, and freeze your investments. If matters are prolonged or if the balance owing is quite high, it is highly likely that the CRA will issue a lien against any property that you own.
Did you know that taking out a personal loan is a viable option to pay off your tax debt for many reasons? You can even apply for a loan with our partner at Borrowell and, if approved, receive it in 24-hours!
In case you are still not convinced that owing money to the CRA is a bad idea, let us look at this scenario in a little more detail.
What happens if you do not pay the CRA on time?
If you have a balance owing from the previous year, the CRA charges compound daily interest on your balance and that includes interest on penalties starting the day after your filing due date if you are late filing the return. The fact that the interest compounds daily means that it really adds up quickly and before you know it the balance owing can go from being hard to pay back, to impossible to pay back.
The tax filing date this year for most Canadians is April 30th, 2019, and for self-employed Canadians, for 2019 it is June 17th, 2019 BUT, if you owe money, it is due to the CRA by April 30th.
Be sure to give yourself plenty of time to file.
You should also be aware that the rate of interest charged can change every three months. Plus, if you have amounts owing from previous years, the CRA will continue to charge compound daily interest on those amounts as we mentioned above, but they can also double the penalty for every year late – don’t forget interest is also charged on the penalty.
For more information on interest and the CRA, visit the CRA’s website.
Late penalties with the CRA are also pretty hefty. If you file your tax return after the due date and you owe money on that return, the CRA will charge you a late-filing penalty of 5% of your total balance owing, which grows by 1% every month that your return is late, to a maximum of 12 months.
Additionally, if you have been assessed previous late-filing penalties, your penalty could double to 10%, plus 2% of your balance owing for each full month your return is late (to a maximum of 20 months). Before you know it, the penalties add up. I recall encountering a chronic late-filer who had incurred a 90% penalty on his tax return for being late 19-years in a row.
Filing your tax return late, and paying a balance outstanding over a period of time has severe consequences that can end up costing you more than just the amount of taxes that you owe. It’s best to avoid being late altogether if you can.
Can I use a personal loan to pay off my taxes?
Yes – absolutely!
A personal loan may be the perfect option to pay off your taxes. Let’s work through the pros and cons to see if a personal loan is right for you.
Pros of taking out a personal loan to pay off taxes
- Favourable loan terms
You should absolutely shop around to find the personal loan with the most favourable loan terms. This means a low-interest rate and flexible payment options. Your interest rate should be one of the main deciding factors when comparing loans. Borrowell personal loans start at 5.99% APR*. If you qualify, you’ll be offered a 3-year or 5-year option, so you can pick a debt-free date to work towards.
- The loan amount
You’ll need to find a loan that covers the amount you owe to the CRA, but at the same time, you also don’t want to risk taking on too much debt. Borrowell offers personal loans from $1,000-$35,000, which should be substantial enough to pay down your tax debt. Check your rate on a Borrowell personal loan to see what you could qualify for.
- Loan fees (or lack thereof)
If you want to pay off your loan early, some lenders, like Borrowell, will not charge you any repayment fees. These seemingly small perks can make all the difference when you’re working towards paying off your debt.
Cons of taking out a personal loan to pay off taxes
- Hidden costs
Be sure to carefully read the terms and conditions on any loan you are considering. Origination fees are standard because they are what fund most online platforms, however, be wary of any unadvertised fees or costs, such as loan repayment fees. Do not be afraid to ask the loan provider any additional questions you may have because it is your money, after all.
- Too-high Interest rates
It is important to make sure the interest rate you are getting on a personal loan is favourable. Depending on the lender, some interest loans may not be as competitive as others which is why it’s important to shop around and weigh your options.
While the CRA does offer tax debt repayment plans, they do so only when you can prove that you do not have the ability to pay, or to borrow, and they can also stop that payment plan and commence collection actions if they feel that you could, or should be paying more to them.
You really need to weigh both options and see what is best for your own situation.
What Not To Do With Your Tax Debt
- Let the CRA dictate terms
As mentioned above, the CRA will allow you to pay back your taxes owing via a repayment plan, but it does not come without strings. In order to be accepted for this plan you have to give the CRA full disclosure about your finances, and if they still agree, then you get to repay your debt, with interest still being charged and you must remain current and pay all future taxes owing as well.
Taking into account the high rate of interest that the CRA charges and the fact that they could stop the plan and take the funds you owe from your bank account, employer, or a receivable, makes it a high-risk method.
- Credit Card
This is strongly advised against because of interest rates on credit cards, most falling anywhere between 19.99% to 29.99%. These kinds of interest rates are a lot higher than those of the CRA or from any lender. This could also negatively affect your credit score because of your credit utilization ratio, which is how much credit you’re using out of what’s available to you.
The Bottom Line
There are a few options for you to consider, but the most important thing is that you find a way to pay the CRA as quickly as possible, and in full.
Our advice: Weigh all of the options available to you and make a decision that is best for your finances and mental well-being.
TurboTax has partnered with Borrowell!
Borrowell provides Canadians with free access to credit scores and credit reports. They make recommendations to help Canadians make great decisions to improve financial well-being as well as providing fixed rate personal loans, credit cards and the best mortgage rates to suit your individual financial needs and help you manage debt.
*Please note that final approval of your application for a Borrowell loan is conditional on completion of the steps set out in your application (including identity, income, and bank account verification) as well any further underwriting review deemed necessary. Additional documents may be required. Borrowell retains the right to adjust any loan options presented to you or to decline your application at any time prior to final approval.
Canadian Tax Expert @ TurboTax. Former CRA employee.