Tax Debt? Here’s what to do.

The CERB, CRB, self-employed worker sales tax and RRSP and RRIF withdrawals are all income to be declared that can increase your tax debt. You may not be able to pay them all in one shot, especially if you’ve already accumulated amounts. There are solutions though.

In short

If you’re not paying your tax debt, the Canada Revenue Agency (CRA) and Revenu Québec will require you to do so.
They have very effective tools at their disposal such as garnishment of wages, bank account freeze, seizure or sale of property or assets, The longer you take to pay your debts, the greater the interest and penalties will be. Better act quickly!
There are three main solutions available to you:
- Payment arrangement: by contacting Revenu Québec and the CRA, you could spread your payments over several months.
- Consumer proposal: once accepted by your creditors, it allows you to repay your debts over a period of up to five years.
- Declaring bankruptcy: you’re starting over on the right foot by clearing all of your debt.

Contrary to popular belief, tax debt can be included in a bankruptcy and/or consumer proposal.
Filing an income tax return can also have several advantages. Based on your situation, you could be entitled to benefits or allowances.

First of all, you should know that if you do not pay your tax debt or pay late, you risk numerous sanctions from the CRA or Revenu Québec. You will first receive a Notice of Assessment. If you do not pay your balance, you will be considered in default. You can be sure that these two government authorities will not stop until you pay them what you owe. They have many very effective tools at their disposal, such as:

Garnishment of wages: this is one of the first actions taken by the CRA to recover tax debt from wage earners. It means that your employer will have to pay the CRA a part of your salary until the entire debt has been repaid. The CRA will determine the amount payable (generally, 30% of your salary). If you are self-employed, you will not receive amounts owed by your clients, since these will be going directly to the tax authorities.

Bank account freeze: you will no longer be able to access the money in your accounts (personal or business). The CRA could seize the funds until you pay your debt or enter into payment arrangements. Obviously, this measure will have an impact on your mortgage and car payments and daily expenses.

Seizure and sale of property or assets: your investments, including your RRSPs and TFSA, your car, computers or any other personal property can be seized without Court approval.

Seizure of your spouse’s salary and accounts: being held jointly and severally liable for your tax debt, your spouse’s salary, property, assets or accounts may be seized like your own.

Registration of a Crown mortgage on your property: in order to protect their claims, the CRA and Revenu Québec can register a Crown mortgage on your property without your consent.

Although rare, some tax offences can lead to jail time. In addition, the longer the delay in paying your debts, the greater the interest and penalties. So, the last thing you want to do is to ignore the problem. If you have tax debt, take action as soon as possible!

Tax debt solutions

There are several ways to put an end to your tax debt. The three main ones are: enter into a payment arrangement with Revenue Quebec and the CRA, file a consumer proposal or declare bankruptcy. Contrary to popular belief, tax debt can in fact be included in the last two strategies.

Payment arrangements

Contact Revenue Quebec and the CRA as soon as possible. Generally, these institutions are open to making an arrangement with people who have tax debt. You can spread your payment over several months. However, the longer you take to pay, the more interest charges will be added to your balance.

If a situation beyond your control (serious illness, catastrophe, loss of employment, etc.) prevents you from paying your taxes, the CRA and Revenu Québec may be able to lighten your debt by waiving the interest and penalties.

Consumer proposal

A consumer proposal is a negotiation with your creditors that allows you to partially repay your debt over a period of up to five years. You don’t have to file for bankruptcy. This arrangement allows you to pay off all your unsecured debts (credit cards, lines of credit, tax debts) in one monthly payment based on your budget.

For more information, consult our section on consumer proposals

Declaring bankruptcy

Bankruptcy can be used when no other solution is possible. It allows you to get a fresh start by eliminating all your debts. Bankruptcy protects you from most lawsuits or wage garnishments and prevents you from having your telephone or electricity services cut off. You should know that filing for bankruptcy doesn’t mean losing everything. Many assets are exempt from seizure, such as your home or your car.

For more information, consult our section on bankruptcy. In any case, if you can’t pay your tax debt, consult a Raymond Chabot licensed insolvency trustee who can help you determine which solution best suits your financial situation.

Advantages of filing an income tax return

Filing your taxes doesn’t mean there aren’t upsides. You can:

Be refunded for source deductions
Receive the Canada Workers Benefit
Receive the Canada Child Benefit
Receive the Goods and Services Tax (GST) Credit
Receive the Guaranteed Income Supplement
Be refunded for contributions to the QPP/CPF, QPIP and employment insurance
Split your pension income with your spouse

Based on your personal situation, you could also be entitled to the solidarity credit or other types of allowances. In short, by not filing your tax return (even if you have no income to declare), you could be depriving yourself of additional income.

Solutions to avoid

In general, avoid paying your tax debt using:

A credit card advance; or
A personal loan.

You will pay much higher interest rates than the CRA and Revenu Québec. Instead, try to contact both authorities to negotiate a payment arrangement.

You have tax debt? Regardless of the amount you owe, don’t hesitate to contact one of our financial recovery counsellors. They can help you find solutions.