If you owe tax debt to the Canada Revenue Agency (CRA) and you are having difficulties paying it, you may wonder what steps you should take to minimize interest accruement and avoid penalties. Although there is a certain procedure you should follow, it is first important to understand what the CRA can do.
Common Types of Debt
There are many common types of tax debt the CRA collects. These include:
- Personal income tax debt—Most people have their taxes taken at the source so that they do not owe personal income tax debt. However, if you sold real estate during the year, you are self-employed, or you have collapsed RRSPs or other investments, you may owe personal taxes.
- HST—If you provide goods and services as part of your business and you are self-employed, you are subject to charge and collect HST. Typically, you are required to make payments monthly, quarterly, or annually to the CRA.
- Source deductions—As a business owner with employees, you are required to pay monthly payroll taxes to the CRA.
Additionally, if you are a director a corporation and your company fails to pay its HST or source deductions, you may be held personally responsible for paying these debts. Please keep in mind that corporate income tax does not have any director liability.
Before the CRA enforces a debt against you or your business, they have to provide you with an Assessment Notice. After you receive this notice, you have 90 days to appeal if you disagree with the balance. After this 90-day period, you must pay this amount.
If you are a T4 employee, you may receive a garnishment notice from the CRA known as a Requirement to Pay (RTP). If you receive one of these notices, the wages you receive from your employer will automatically be garnished at a rate around 30 percent. Please keep in mind that the CRA can do this without your permission, and they can seize any funds currently being held at your bank.
Comparatively, if you run a business and the CRA sends you an RTP, this agency can freeze your credit lines and garnish 100 percent of your receivables.
Additionally, if you own any real property or vehicles, the CRA can place a lien on the assets. Until your outstanding tax balance is paid, the lien will not be removed. If a lien is placed on your home, you will not be allowed to refinance your mortgage without the CRA’s consent. The longer you continue to pay your mortgage, the larger the lien also becomes on your property.
Penalties and Interest
If you file your taxes late and you owe tax debt, the CRA can impose a late filing penalty on you that ranges anywhere from 5 to 20 percent on the owed balance, depending on your past payment and filing history. How much interest you are charged on this penalty compounds daily under regulations set forth in the Income Tax Act. Additionally, if you owe HST, the CRA imposes late filing penalties and charges interest on any balances or installments that are unpaid.
Please remember that if you owe the CRA money, it is best to deal with the situation as soon as you possibly can. At Morgan & Partners Inc., we are here to help and can pair you with a licensed insolvency trustee who can help you manage your debt and any penalties imposed by the CRA.