I owe money to the CRA but can't pay, what can I do?
From Taxpayers Advocate
First, don’t panic. There are ways to work with the Canada Revenue Agency to pay your debt gradually and avoid unilateral collection action such as frozen bank accounts or seized wages. Generally speaking, if you regularly talk to the CRA and give them your financial information they will work with you to find an agreeable Payment Arrangement for your debt. In order to do this, you need to understand exactly how much you owe CRA and how much you can pay towards your debt.
I always tell taxpayers to first check to see if their debt is accurate, as in is this what you were expecting based on the tax returns you filed? If no, you need to find out why not. If there is any legal way to dispute the accuracy of the tax amount the CRA say you owe, you should do this immediately. If you are not sure if your tax amount is accurate, speak to a professional and find out. You may be able to have your returns adjusted informally or to file a Notice of Objection and start the appeals process to correct errors in your assessments and ensure the correct amount of tax is on your assessment.
Once you know how much tax you have to pay, you need to come up with a plan to pay it. If you have any savings or assets that you could sell or collapse to pay your debt, this is often the best way to deal with it. The CRA charge astronomical Interest Rates so the longer you have an outstanding debt, the bigger it grows. If you don’t have savings or available cash to pay the debt, you should speak to your bank or a broker about getting a loan to pay off your tax debt. It is nearly always cheaper to pay regular bank interest that the high rates charged by the CRA so getting a loan will likely save you money in the long term. If you can’t get a loan, you should get a letter from the bank saying you can’t get a loan as the CRA will undoubtedly ask for this at a later date. The CRA will only consider something less than payment in full if you can show you have tried every avenue to obtain funds to pay your debt and they are sticklers for demanding things like letters from various banks to show you tried to get loans.
Once you can show you can’t find a way to get the money together to make a lump sum payment towards the debt, your next option is to try and convince the CRA to let you pay it off monthly. To do this, you need to write out your average monthly income and your expenses and determine what amount you could spare to pay to the CRA. If you have fluctuating or seasonal income, the best you can do is use a realistic average to predict what you might be able to afford. When calculating your expenses, be reasonable. You can’t budget $1,000 a month for dinner at nice restaurants if you are only earning $2,500 a month. The CRA expect you to live frugally and like a slave until your tax debt is paid so you may have to rethink or limit your personal expenses. Bear in mind, you are going to use this number as a proposal to convince the CRA that they should let you pay your debt gradually. They don’t have to let you and could just force you into bankruptcy so you need to be sure that you offer as much as you possible can towards your debt. The CRA also expect that income and expense calculations are done for the whole household together which can cause some problems between spouses as technically your spouse isn’t responsible for your debt.
Once you have a monthly figure you think you could manage, you should divide your total debt by this figure to work out how many months you will need to pay your debt. If this is over 24 months, you may have a hard time convincing the CRA this is a viable plan. Either way, the best thing to do is to set out what you think you can pay and how long you need to pay your debt and explain how you have calculated this figure. The CRA have an Income and Expense and Net Worth Statement they like to use but any simple breakdown of your income and assets, expenses and liabilities will show your financial situation for the purposes of setting up a payment arrangement. It is a good idea to have ready or send to the CRA current statements for your mortgages, loans, credit cards and other liabilities as well as your paystubs and bank statements to show that your figures in your proposal are accurate. Your Credit Report may also be worth including as this will confirm many of the figures on your financial breakdown. The idea is to show that you are not hiding anything and this is genuinely all you can pay towards your debt right now.
When you are ready to make your proposal, you can do this in a number of ways. If you are already dealing with a collection agent or have received letter with a contact name, you can mail a package to this particular agent and speak to them about your proposal. If you do not yet have an agent working your file, you can just send a package with all the information (and possibly post-dated cheques) to your Tax Centre. Alternatively, you can call the CRA Debt Management Call Centre on 1-888-863-8657 and negotiate over the phone or even ask to meet someone in person to go through everything together. There is also an automated telearrangement service you can access by calling 1-866-256-1147 and a pre-authorized debit service you can set up on My Account but these tend to be limited to more straightforward arrangements. Overall, it is a good idea to start making payments as soon as you can as a sign of good faith while the CRA consider your request.
Payment arrangements with the CRA are a little funny as they are not set in stone. One agent may agree to what you propose and then 3 months later another agent starts working on your file and asks for more money. You would then have to go through the whole process of justifying your payments to the new agent. It is better to think of them as an informal agreement than a proper contract and always tell the CRA if your situation changes and you can pay more/less towards your debt. Typically, the CRA reviews payment arrangements at least once a year so you should keep your documents handy to show you have been sticking to your budget. Once you have a payment arrangement that has been accepted, or once you start making payments, you should also consider applying for Taxpayer Relief.
Taxpayer relief is basically a way for the CRA to use their discretion to waive or cancel interest charges on your account. In their guidelines, the CRA indicate they will consider reducing interest charges for people who show their “ability to pay requires an extended payment arrangement” (meaning you can’t pay your debt in full in one lump sum). They basically say that if you need time to pay, they will consider waiving interest from the time you start making payments up to when you debt is paid in order to avoid further interest accumulating while you are making payments. The idea is that if you are absolutely paying everything you can towards your debt then the CRA will cancel additional interest to help you pay your debt in a reasonable amount of time. You can also ask for past interest charges to be reduced but this usually requires more explanation and reasons to show either that you could not pay in the past or that the delay in payment or reason for the penalties was due to extraordinary circumstances. Taxpayer relief applications can be fairly simple and you can use the CRA’s form or write a letter asking for relief. It takes the CRA several months to make a decision on these types of applications and they are not always successful but there is no harm in at least asking.
If you work through all your numbers and the CRA still refuse your proposal, you might want to ask to speak to the agent’s team leader and see if they are more reasonable. If that still doesn’t get you anywhere, you might want to chat to a professional to see if they can help or file a service complaint if you think the CRA are not treating you fairly. It may also be helpful to speak to a credit counsellor or trustee to see if there is anything that could be done to improve the proposal you are making to the CRA and to explore other options such as consumer proposals and bankruptcy. At the end of the day, the most important thing to do is to try your best to take control of your debt and find a way to manage it and get it paid off. Collection agents can be very aggressive and it is their job to collect money and odds are they will have heard every excuse and sob story under the sun at least twice that day already. Being honest, polite and co-operative is your best chance and getting an agreement in place.