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The tax trap: How to stay in CRA\u2019s good books when you owe unpaid taxes<\/p>\nThe tax trap: How to stay in CRA\u2019s good books when you owe unpaid taxes<\/p>\n
As per a recent Toronto Star article the April 30 deadline for most Canadians to file their income tax returns has passed, and amid the pressures of inflation and high interest rates, many may be finding themselves struggling to pay what they owe.<\/p>\n
Self-employed individuals especially often find themselves owing the CRA, since taxes aren\u2019t withheld on their paycheques. \u201cIf they don\u2019t have good advice or they\u2019re not experienced, they may have spent the money without realizing they\u2019d owe taxes,\u201d says John Oakey, vice-president of taxation for CPA Canada.<\/p>\n
While the deadline for self-employed Canadians to file their tax returns is June 15, the CRA still expects any amount owing to have been paid by April 30. Since June 15 falls on a Saturday, you will be considered to have filed on time if your return is received on or before June 17.<\/p>\n
If you\u2019re waiting to file out of fear you owe, the first thing to be aware of is that the CRA charges compound daily interest on any unpaid amount owing for 2023 as of May 1, including the self-employed. The current compound interest rate is 10 per cent.<\/p>\n
There\u2019s also a late-filing penalty, which is at least five per cent of your balance owing and can be up to 10 per cent for habitual late filers..<\/p>\n
You\u2019ll also be charged an additional one per cent on any taxes that you owe for each full month that you file after the due date for up to 12 months. All of this is to say that if you owe money and you missed the April 30 deadline, you should still file your return as soon as possible.<\/p>\n
The CRA appreciates good-faith payments made before a tax officer is assigned to a case, says Jason Rosen, managing partner at Rosen and Associates Tax Law in Toronto. It reflects well in your compliance history and shows your intention to pay off the balance.<\/p>\n
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If you have no extra cash to put toward what you owe, Oakey suggests borrowing money from family or taking funds from a line of credit, which may allow you to pay it off at an interest rate lower than the CRA\u2019s 10 per cent.\u00a0Just don\u2019t use a credit card to pay it off, experts caution, since the interest rate is likely to be much higher.<\/p>\n
\u201cYou don\u2019t want the CRA to assume that you\u2019re not willing to pay,\u201d Oakey says. Contact them and let them know that you would like to set up a payment plan.<\/p>\n
Before reaching out, calculate your monthly income and expenses and determine how much you can afford to pay on a regular basis. The CRA suggests you make payments that will clear the balance owing within six months to one year, Rosen says.\u00a0Make a phone call or arrange a payment plan online if you\u2019re registered with the CRA\u2019s My Account.\u00a0Once you\u2019ve committed to a monthly payment schedule, work it into your budget. If for some reason you have to change the timeline or miss a payment, let the CRA know as soon as possible or you could be charged penalties.\u00a0If at any point the CRA reaches out to request information, be sure to respond with what they\u2019re looking for (which could include proof of employment and bank statements), Ricchio says.<\/p>\n
\u201cYou may get a phone call that says, \u2018You owe $1,000 to the CRA and if you don\u2019t pay immediately, you\u2019re going to go to jail,\u2019\u00a0 That\u2019s a red flag, since the CRA doesn\u2019t work that way. Call the CRA directly to verify whether you have a balance owing in this case, or log onto your CRA My Account.\u00a0Don\u2019t ignore the problem<\/p>\n
Burying your head in the sand might be tempting, but if you ignore the problem now, it will catch up with you eventually.\u00a0The CRA can take legal actions, including garnishing your income and putting a lien on your assets, if you have a debt and haven\u2019t confirmed arrangements to pay it, or if you don\u2019t make your scheduled payments on time.\u00a0They\u2019ll typically make three attempts to provide a legal warning by phone, and then send one written legal warning letter. But there are no formal timelines for when this could occur.<\/p>\n
The CRA can also put any benefit payments you may be expecting to receive, (such as the GST\/HST credit) toward your balance owing instead of paying it out to you.<\/p>\n
Under certain circumstances (such as dealing with a serious illness, the death of an immediate family member or financial hardship), you can request to cancel or waive penalties or interest. The Taxpayer Relief department reviews and considers applications to determine whether the circumstances are compelling enough, Rosen says, which can take anywhere from six months to two years.<\/p>\n
Essentially, you\u2019ll need to prove that paying the interest would make it difficult for you to afford basic necessities (like food and shelter) for a prolonged period of time.\u00a0They\u2019ll also consider the amount owing, how long it\u2019s been owing, and other factors.\u00a0Be sure to provide any information that could support your request.<\/p>\n
Accountants routinely deal with the CRA and can help facilitate communication around setting up a payment plan, Oakey says. A chartered professional accountant (CPA) can also help fill out the form to request a waiver of interest and penalties. Usually the CRA will require documentation to prove that there is financial hardship, and a CPA can help with that as well.<\/p>\n
If you don\u2019t agree with the CRA\u2019s assessment of your income tax, you have the right to make a formal objection. If the CRA reviews your books and argues they\u2019re not complete, reliable or accurate (which they can determine on their own accord) they can do a net-worth audit.\u00a0This looks at a lifestyle, which means whatever they\u2019ve observed based on monthly income, expenses, assets and liabilities. They can assume any increase in net worth is unreported income unless you can prove otherwise.\u00a0If you ignore your tax balance, the Canada Revenue Agency can take legal actions, including garnishing your income and putting a lien on your assets<\/p>\n
Self-employed Canadians should set themselves up for tax-filing success by creating a reserve fund for taxes. Throughout the year, allocate any where from 25 to 30 per cent of your income toward this reserve.\u00a0Working with a chartered professional accountant in advance also means self-employed folks can get an idea of what their tax results will be.\u00a0If you\u2019re an employee, you can ask your employer to deduct more income tax from each pay cheque so that you owe less at the end of the year. \u201c<\/p>\n
An accountant can also help you figure out if you\u2019re eligible for any tax credits and deductions in the future. Even if you self file using software such as TurboTax, you can reach out to a professional for assistance.\u00a0At the end of the day, the CRA just wants to collect its money.<\/p>\n
Taking ownership of the situation and addressing it the best way you can demonstrates a genuine intention to be compliant goes a long way.<\/p>\n
I have been able to help out many small and medium businesses resolve their CRA issues with outstanding taxes, either personal, business, withholding, GST or source deductions. Please don’t hesitate to reach out if I can be of assistance.<\/p>\n
Terry Lynch, Mortgage Agent Level 2<\/p>\n
416-315-1787<\/p>\n