Tax debt? You have options

This year’s tax season will more than likely be extra challenging for the nearly nine million Canadians who applied for the Canada Emergency Response Benefit in 2020.

Why do I owe on my income tax return?

Many Canadians are accustomed to seeing income tax payments on their regular pay cheques. These payroll source deductions approximate what you should owe at tax time, assuming your current income is representative of what you’ll earn throughout the year. These calculations are typically quite accurate for most salaried and hourly employees — barring any significant changes to employment status, income, or investments — which is why comparatively few have a significant balance owing at tax time.

The tax deficit can build up quickly if your deductions are not in line with your annual income or you are not regularly remitting income taxes to Canada Revenue Agency (CRA), as is the case with many self-employed individuals, investors and (in the case of 2020) CERB recipients. Miscalculating your total annual tax burden and/or failing to set enough money aside to pay your taxes can end up a hefty debt.

Neglecting your taxes for several years can generate a similar, seemingly insurmountable deficit.    

What are my options to deal with income tax debt?

Payment arrangements

If you’re unable to pay your outstanding income tax debt as a lump sum, reach out to CRA as soon as possible. Explain your financial situation and propose a reasonable amount you can afford to pay every month. Being proactive can help avoid significant interest and other penalties for non-payment.

Consolidation loan

If you cannot make a favourable arrangement with CRA, reach out to your bank or another private lender to discuss options for a consolidation loan. This would effectively allow you to pay off the income tax debt, plus combine any other outstanding debts into a single monthly payment. Just remember the goal here is to make your debt more affordable. If you cannot find a better interest rate than what CRA is charging, it is likely not beneficial to consolidate just to eliminate an income tax debt.

Bankruptcy or Consumer Proposal

If your income tax debt has placed you in a position where you can’t afford the payments and your other monthly expenses, the Bankruptcy and Insolvency Act (BIA) can likely deliver the relief you need. Income tax, GST, payroll source deductions (e.g. CPP, EI), and debts owing to Canada Mortgage and Housing Corporation may all be included in a Bankruptcy or Consumer Proposal. 

How do I know which option to consider?

MNP offers Free Confidential Consultations to individuals who are struggling with unmanageable debt and need a financial fresh start. During this no-obligation initial meeting, a Licensed Insolvency Trustee will review your entire financial situation, including your outstanding debts, income, and income tax situation. They will use this information to outline all your options in detail and provide you with an unbiased recommendation to help you deal with your debts.

Why Consumer Proposal?

A Consumer Proposal may be your best option when dealing with CRA if you’re financially able to make payments but can’t afford the entire amount owing. Depending on your situation, the Licensed Insolvency Trustee will likely be able to negotiate a reduction in the total value of the debt — in line with your household budget — and stop any ongoing interest.

Payment of your Consumer Proposal could be a single lump sum, or monthly over a period of up to five years. Once you complete your payment arrangements and fulfill your duties you would be released from your debt.

Why Bankruptcy?

A Bankruptcy may be your best option if you:

• Have an excessively large amount of debt
• Don’t own a large number of realizable assets
• Don’t earn enough to make a Consumer Proposal which your creditors would be likely to accept
• Don’t expect your income situation to change over the next year