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Do You Owe Back Taxes? Here’s How the CRA’s Payment Plan Can Help

Owing money for back taxes to the Canada Revenue Agency (CRA) can be a stressful experience. However, if you can’t pay off your income taxes in full by the deadline, the CRA is willing to work with you by setting up a CRA payment arrangement.

What to Do if You Owe the CRA Money

If you’re looking to strike a deal with the CRA on your back taxes, it’s not going to happen. The CRA will not negotiate any kind of deduction to your debt unless you file for Bankruptcy or a Consumer Proposal. If you don’t pay your debt, the CRA may take legal action which could have serious legal or financial consequences.

The CRA has the power to garnish your wages as well as redirect any money from any benefit you receive from the federal government, including employment insurance (EI), Canadian Pension Plan (CPP), and Old Age Security (OAS). But, it doesn’t have to come to this because the CRA will allow you to pay them back using a CRA payment plan.

What Is the CRA Payment Plan?

A CRA payment plan is an agreement between you and the CRA that you will pay your balance in several regular payments over a specified period of time.

How to set up a payment plan with the CRA

If you can’t pay your tax bill the first step in the process is to communicate with the CRA. This gives you a chance to speak with a CRA representative, ask questions, and gain a better understanding of your options. It also makes you look like you are taking initiative and ready to deal with the issue at hand.

Once you have reached out to the CRA and determined that you want to move forward with the CRA payment plan, you will need to complete the following steps:

1. Calculate your monthly income and expenses

The CRA provides a personal income and expense worksheet that you can use to determine your regular payments. You will be asked to enter all sources of monthly income including your salary, Old age security (OAS), disability benefits, Canada child benefits (CCB), scholarships, workers compensation benefits, and more. The worksheet then prompts you to enter your household expenses ranging from mortgage and rent payments to property taxes, insurance, and groceries.

When you’re finished entering your information, the worksheet totals up your income, expenses, and if you have any remaining income available. You can use this to determine if you have the financial means to meet your payment responsibilities. You can use your results to develop a proposed payment arrangement to pay back the CRA.

2. Determine what you can afford to pay 

The CRA website also provides a payment arrangement calculator that you can use to calculate when you can expect to finish paying your CRA debt. It also provides an estimate of how much interest you’ll pay.

You are asked to enter the following:

  • Amount of tax debt
  • The date you will make your first payment
  • How often you will make a payment (frequency)
  • Interest rate (they recommend using 5% as the default)
  • Amount per payment or number of payments

3. Call to set up your CRA payment arrangement

To set up your payment arrangement, you will need to contact the CRA. For more information, you can visit the CRA website.

4. Start your CRA payment arrangement 

To initiate your payment arrangement, you simply make your first repayment. It’s up to you to make sure you stay on top of your payments and make them on time. The CRA allows you to pay online, in person, or by mail.

If for some reason, you are unable to make a payment, you must contact the CRA to avoid legal action. Remember, you will pay interest on your debt until you pay off the entire balance.

Partial payment

If you can afford it, you also have the option of making a partial payment to the CRA. This helps to reduce the amount of interest you will have to pay on the unpaid balance.

Taxpayer Relief Provisions

The government may grant you relief from interest or penalty in certain situations that are beyond your control and prevent you from meeting your tax payments, including:

  • Extraordinary circumstances
  • Actions of the CRA
  • Inability to pay or financial hardship
  • Other circumstances

A good example of a situation that is beyond your control is the global COVID-19 pandemic. In February 2021, the government granted targeted interest relief provisions to Canadians who received financial assistance benefits related to the pandemic. After filing their taxes, any eligible Canadian with outstanding income tax debt was not charged interest.

How Can a Licensed Insolvency Trustee Help?

If you successfully set up a CRA payment arrangement but still struggle to make your payments, it’s time to contact a Licensed Insolvency Trustee (LIT). A LIT can look at your financial situation and recommend a debt relief option that makes sense for you. A LIT is also the only professional in Canada that can provide a full range of your debt options including a Consumer Proposal on Bankruptcy.

In a Consumer Proposal, you and your LIT work together to create a proposal to pay off your creditors. You offer to pay a certain percentage of what you owe over a certain period of time. If your creditors accept, then you eliminate a portion of your debt. A Consumer Proposal can include federal income tax debt to the CRA.

If a Consumer Proposal isn’t successful, you can consider Bankruptcy. In Bankruptcy, you surrender your assets in exchange for the elimination of your debts. Tax debt is unsecured debt and is therefore included in Bankruptcy.

If you are feeling overwhelmed by your debt, reach out to one of our trusted Licensed Insolvency Trustees and Adamson and Associates. You don’t have to do this alone. Call us for a free, no-obligation consultation at 519-310-5464 or reach out online.

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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