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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.