Dealing With Personal Income Taxes And The Canada Revenue Agency

Personal income tax debt is a huge problem for both salaried and self-employed Canadians. The question is: why?

Many Canadians lack a clear understanding of how the Canadian tax system works and how they may work the system to their benefit. They fail or neglect to file their yearly personal income tax return on time and they are not paying the tax debt required in order to avoid possible penalty and interest charges or legal actions by the Canada Revenue Agency (CRA). This blog post addresses some of the most common questions and misconceptions we hear about resolving income tax debt.

If I don't pay my taxes by the deadline, what is the penalty?

If you have a balance owing and you don’t file your return on time, the CRA will charge you a late filing penalty. The penalty is 5% of your current year balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months.

At what point does the CRA take action – and what action do they take?

Any amount you owe is payable in full immediately when you're assessed or reassessed. If you do not pay the outstanding debt or contact the CRA to discuss payment of your debt, the CRA may take legal actions to collect the unpaid amount. Normally the CRA cannot initiate legal action until 90 days after the day the CRA mails the Notice of Assessment or Reassessment.

Types of legal actions the CRA may take:

• Garnish wages
• Freeze and / or garnish bank accounts
• Seize income tax refunds owing to you until you have filed all outstanding returns and paid the tax owing on those returns
• Place a "Writ of Sale and Seizure" against your home
• Set-off against amounts that may be owing to you by other federal government departments to have all or part of that money sent to the CRA (i.e. GST / HST credits)

If I declare bankruptcy or file a Consumer Proposal, I’ve heard that personal income tax debt cannot be negotiated. Is that true?

By filing a personal bankruptcy or a Consumer Proposal under the Bankruptcy and Insolvency Act, there is an automatic stay of proceedings which will immediately stop the CRA's collections actions. All interest and penalties will stop at the date of bankruptcy or at the date of the Consumer Proposal. A Consumer Proposal gives you time to negotiate an acceptable payment arrangement with the CRA and your other unsecured creditors. Tax debts are generally dischargeable debts and released upon being discharged from bankruptcy or completion of a Consumer Proposal.

I’m having trouble paying my taxes. What can I do?

Despite the negative associations people have with paying their taxes, CRA can help you make it more manageable ot pay your taxes. For example, you may speak to CRA about setting up an installment plan in advance of the regular tax season. You can also reduce your tax bill by increasing the tax deducted at source. Talk to your employer about having tax or more tax deducted from your salary, pension benefits from an employer-sponsored pension plan and Old Age Security or Canada Pension Plan benefits. Another option is to talk to a financial planner or professional accountant to discuss strategies to minimize your taxes payable.

Why is it important to file my income tax return each year? What will happen if I don’t?

Many Canadians do not understand the importance of filing a yearly income tax return. By filing your return on time, you are letting the CRA know your current tax situation. Without that information, the CRA cannot determine if you are still eligible to receive certain benefit payments.

Even if you have no income to report, you should still file a (nil) income tax return to be eligible to receive certain tax credits and benefits such as GST / HST, provincial credits (i.e. Ontario Trillium Benefit), Canada Child Tax Benefit and the Universal Child Care Benefit.

You are entitled to a fair treatment in all your tax dealings with the CRA. If you do not understand your Notice of Assessment, you may call the CRA at 1.800.959.8281 to speak with an agent who will explain it to you. If you do not agree with your Notice of Assessment and would like to dispute it, you may file a Notice of Objections with the CRA stating the grounds for dispute. As a final note, be sure to keep your income tax records and supporting documents for six years – that’s the timeframe CRA can come back and reassess your taxes.

If you are still struggling with paying your income taxes or you have outstanding levels of income tax debt, speak with one of the debt help professionals at MNP Ltd. We can help you take control of your finances with one of our life-changing debt solutions.​