Taxes Owing and Not Able to Pay. What are the Options?

As a Chartered Accountant with an income tax background, I meet with many people from Kitchener, Ontario, who owe money to the Canada Revenue Agency (CRA or formally Revenue Canada). There are many reasons why people might owe back taxes:

  • self-employed individuals owing GST, Source Deductions, and personal tax;
  • pensioners owing taxes for the first time in their lives as their pensions did not have enough taxes taken off resulting in tax debts too large to manage on a fixed income;
  • individuals who have cashed out their RRSP’s as an attempt to get their other debts under control, only to find that not enough taxes were taken off and now they have a large tax debt; and
  • employees working more than one job just to make ends only to find out they have a tax debt at the end of the year due to working the multiple jobs.

Many individuals have the notion that tax debts are different from their other debts and have special rights – this is only partially true. Tax debt is governed by tax laws, there are special rules, and in addition, the Canada Revenue Agency (CRA – or formally Revenue Canada) has significant collection powers compared to other creditors. However, when it comes to a consumer proposal or personal bankruptcy, taxes are generally dischargeable debts (ie they go away upon completion of the procedure) just like your credit cards, bank loans, or other unsecured debts.

When it comes to tax related debts, your options for dealing with them remain the same. You can:

  1. pay off the debts (through cash on hand, payment plan with CRA, sale of assets, borrowing, or other personal options available),
  2. file an notice of objection/appeal on the assessment,
  3. apply to the CRA’s fairness program to reduce the penalties and interest,
  4. file under the Bankruptcy and Insolvency Act for a consumer proposal
  5. declare personal bankruptcy.

It’s Important to File Your Tax Returns

One type of situation that we see at Hoyes, Michalos & Associates Inc. in Kitchener, Ontario, is when an individual has not filed his/her income tax returns in the past few years as the returns will likely result in a tax debt that the individual could not handle along with his/her other debts.  If there is a tax balance owing on an outstanding income tax return and it is filed late, Canada Revenue Agency (CRA) will automatically charge a 5% late filing penalty and then accrue interest & penalties on the unpaid balance.

If you are considering a bankruptcy or consumer proposal we always recommend that you have your outstanding tax returns prepared and filed so that the debt is known and a plan to deal with debt can be arranged. CRA will not consider a consumer proposal unless your returns are up to date.

At Hoyes, Michalos in Kitchener, Ontario, we help many individuals work out a plan for the future that deals with their past debts including tax debts. We understand that a financial strain can be a very stressful experience, so we encourage you to e-mail us a question or give our Kitchener office a call at 519-747-0660 or 310-PLAN to arrange a free meeting to discuss your situation in more detail.