While there have been plenty of articles and blog postings discussing how to spend your tax refund money – however not as many about what happens if you end up owning money instead?
The reality of it is that many Canadians end of owning money at the end of tax season each year, as opposed to getting money back. Therefore, it is a good idea to be aware of what to do if you find out you do owe money.
At the risk of piling even more tax related anxiety on top of this situation, what happens if you owe money to the CRA (Canada Revenue Agency), however you don’t have the money to pay this amount back in the time allowed or at all for that matter? For individuals in bad credit situations, being aware of some effective tax debt solutions will be of particular interest. With debt in your life and now a tax payment to make, this can make matters even worse. With that being said here are some steps you can take if come tax time you do owe some money to the CRA, yet may not be able to pay it back outright.
Should you owe money to the CRA, and yet you have not already made arrangements to repay it, you can expect to receive a letter from the CRA . This letter will inform you that you have an outstanding tax amount to pay as well as the deadline you need to pay it by. Typically you are required to pay as soon as you have been notified – and online payment is therefore on option for repayment and is set up in order for efficient payments.
This letter will also discuss a variety of legal actions that may be taken if you do not take steps to repay this money. These actions will vary, however the letter will also stress that this is likely to be your final reminder and without action taken on your part, legal ramifications will be the next step.
Legal and collections tools that may follow can include, the seizure/sale of your personal property – aka registering your tax-related debts against any of your personal assets. In order to have your assets released, you may then be made to pay the amount in full before this can take place.
Therefore, if you find you are unable to pay your income tax debt it is best to make arrangements to re-pay this amount prior to arriving at this unfortunate position. Bankruptcy and tax lawyers may then need to be your next steps to resolve the situation.
Here are steps you can take so that this negative situation does not arise. Consider some of these income tax repayment solutions before your tax debt becomes too much of an ongoing nightmare for you.
1. Negotiate a Payment Plan with CRA
Your best bet is to contact the CRA and explain your situation. For example, if you find you are owing $3,000 and can not pay this in one lump sum payment, then you will want to discuss this situation with a representative from your local CRA centre. Together you can negotiate a suitable repayment plan. Perhaps you will arrange to make $300 monthly instalment payments over a period of 10 months and this can then be a more manageable repayment solution for you.
Implications of this arrangement however may come with interest charges until your tax debt is completely paid off. Payment plans arranged through the CRA are also not likely to be extended beyond one year – and your taxes will need to be repaid before the next tax season so you will not fall behind. If this is not a realistic repayment plan for you however, then another tax debt solution will need to be examined.
2. Apply for a Bank Loan
Another method of repaying your tax debt is to try and secure a loan to help you pay it back. While the CRA will not typically allow a repayment plan to last beyond a 12 month period, financing your tax payments however through a bank loan, may be an option that can help you manage this payment over an extended, yet reasonable time frame.
In order for this solution to work for you, it is ideal to have income and expenses that allow you to pay back your tax debt in full within this arranged amount of time. You will also want to be able to provide a secure format for this financing, such as taking out a second mortgage on your home.
3. A Consumer Proposal
Lastly, if a secured loan is not an option to help finance and support your tax repayment plan within a realistic time frame, and yet you still can not pay off the tax amount in full – a consumer proposal may be your next step.
This proposal will involve the support of a Licensed Insolvency Trustee who will work with you to identify the amount of money you can realistically pay each month. This trustee will then take this repayment proposal to your creditors and negotiate these terms on your behalf.
A consumer proposal can be appropriate for you in the event, the amount of debt you owe is less than $250,000, and if your creditors, who represent more than 50% of your debts (to the dollar value) also accept these terms.
This proposal acts as a legal agreement that all creditors must adhere to, with the possibility of the CRA possessing the controlling vote. At this stage, it can be a good idea to meet with the CRA representatives to discuss all of the specific details of how this agreement is going to work.
When it comes down to it, it is ideal to look for assistance, especially with that final tax debt solution in particular. Fortunately, the CRA offers Debt Management Centre support hotline for situations just like these. Therefore, if you can not pay your taxes – just know there are solutions and resources available to you. Tax relief options may also be available to you, so looking into to these can also be a step you can take as a last resort.
Hopefully when all is said and done, you will not end up having to pay income tax amounts or better yet will receive a tax refund. However, if this is not the case and you do end of owing CRA money instead, being aware of what steps you should follow as well as the potential implications of not being able to pay back off your tax debts, will be a very valuable course of action for you.
If you are currently swimming in debt, and wonder how you will also manage to pay back tax debt on top of all that – it is advisable to examine your repayment options and reach out the CRA for resolutions that will work for you and your unique financial situation.
