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How to deal with tax debt in Canada?


You can’t afford to pay your back taxes and the CRA has started collection actions against you. Many taxpayers and businesses find themselves in this situation for one reason or another; it is an everyday scenario that we see all the time in our line of work. Dealing with tax debt is a stressful and daunting task, that cannot be postponed because with every passing day interest is growing on the principal amount, and collection actions go as far as placing a lien on your properties, freezing your bank accounts, garnishing your wages, in a nutshell making life impossible for you and your family.



If this situation applies to you, knowing your options how to deal with it is critical. Is it possible to make a deal with the CRA and obtain some form of debt forgiveness?





We will explore five solutions, including their pros and cons, and our opinion on them.


1. Consumer proposals


Consumer proposals are one way to deal with your debt that you cannot afford to pay, in certain circumstances. While they will grant you a stay of proceedings against you, such as collection actions, lawsuits and wage garnishments, and you can settle for less than the full amount you owe, they will ruin your credit rating and they are quite costly.


2. Bankruptcy


Bankruptcy is similar in many ways to a consumer proposal, in that collection actions against you will cease immediately and once you are discharged, you are debt free and have a clean credit report. In the meantime however, it will be recorded as an R9 on your credit report for 6 years. You will likely lose some of your assets such as your home equity, as opposed to a Consumer Proposal. The fees involved in a bankruptcy depend on your income and generally is costly. Bankruptcies can also be challenged by the CRA.

 

3. Payment Arrangement


One of the most common ways to deal with your tax debt and avoid drastic measures such as bankruptcy or even a consumer proposal, is negotiating a payment arrangement with the CRA so you can pay your back taxes in instalments.


Your payment arrangement will depend on your financial circumstances and you will need to provide documentation for your income and expenses and a bank loan denial letter from your bank. You are also required to get up to date with all your outstanding tax returns before expecting that the CRA looks favourably at your request.





Keep in mind that even though if an agreement is reached with the CRA to pay your debt in instalments, interest will charged until your debt is paid in full.


If an agreement is not reached, the CRA might withhold GST credits, child tax credits, or even garnish your wages and seize funds in your bank account.


4. Refinancing your debt


This is obviously the preferred way to deal with your debt from the CRA’s perspective so this will be their first advice when you are unable to pay off your tax debt. Easier said than done, generally accumulation of a large tax debt is an indication of long term financial challenges, and getting financing without financial stability is difficult.


In debt refinancing, you apply for a new loan that has better terms than a previous contract, to pay off a previous obligation. Refinancing impacts your credit score positively since the payment history will reflect the original debt being paid off.


The Tax Mechanic works with lenders that have helped clients with refinancing and paying off their CRA debt.

 

5. Account Management


An informed decision about how to best handle your tax debt is a daunting process and requires an in-depth understanding of the CRA procedures in accordance with your unique tax situation. Having an experienced firm like Tax Mechanic analyze and manage your account is the best approach, to ensure that the best solution is applied for your case. We review your tax and financial situation, discuss your options and negotiate on your behalf: we do this every day. Some of our clients are lawyers and accountants, who come to us as their last line of defense. Call us for a consultation – we’re here to help!


Written by: Christa Lazar