You don’t have to be a tax cheat to end up with a huge tax bill. Perhaps you didn’t realize you had to declare certain income. Or maybe you were overpaid through a payroll error. Or you moved and the CRA sent your notices to the old address. Or maybe, as sometimes happens, your accountant made a costly mistake.
WATCH: Canadian tax deadline: 8 things you need to know
So what can you do if you owe more tax than you can afford to pay?
Never postpone filing your taxes because you’re afraid of what you’ll owe
Whatever you do, make sure to send in your paperwork by the due date, which is April 30 for most people who expect to have a balance owing. (If you are self-employed you have until June 15 to file, but you still need to pay tax by April 30.)
Avoid adding interest and penalties to your tax debt
Editor’s note: The following paragraph has been edited for accuracy. The example of how interest charges are calculated has been corrected.
Not filing or sending in your taxes late will result in interest and penalties. The CRA will start charging annual interest of 5 per cent on overdue 2016 tax debts as of May 1, 2017.
The interest is compounded daily, which means it is recalculated every day on the initial principal and the interest accumulated. So if you owe $500 in taxes, your interest charge will be $25/365, or $0.068, on May, 1. On May 2, the interest charge will be recalculated on $500.068. And so on.
In addition, the CRA will impose a penalty if you didn’t send in your return on time. The penalty is 5 per cent of your balance owing for the current tax year, plus 1 per cent of your balance owing for each full month your return is late, capped at a maximum of 12 months.
If you also filed late in 2013, 2014 or 2015, the penalty for missing the deadline this year could be as high as 10 per cent of your debt, plus an added 2 per cent for every full month your return is late, up to a maximum of 20 months.
If you can’t pay your tax debt in full, you can contact the CRA to set up a payment plan. There are three ways to do so:
You can authorize the CRA to withdraw a certain amount directly from your bank account on dates of your choosing through My Account, which is your personal CRA account where you can see your taxes and benefits information. If you don’t have My Account, here’s how to get it.
Keep in mind, though, that it takes five business days between when you first set up a debit payment and when the funds will actually go through, according to the CRA. Similarly, if you set up a debit payment plan, you can’t cancel that payment in the five days before it’s due.
Talking to a robot
You can also make payment arrangement by calling the CRA’s automated TeleArrangement service at 1-866-256-1147. In addition to your social insurance number, you’ll need to provide the amount entered on line 150 of your last assessed tax return.
Talking to a real person
If you’d rather talk to a human, dial up the CRA collections call centre at 1-888-863-8657.
Needing a payment plan is another reason to file early, according to Sheryl Troup, director of tax and estate planning at Investors Group.
You generally need to have filed your return before you can set up a payment arrangement, so send in your paperwork as early as you can and start those payments.
That increases the chances that the CRA will spare you any interest charges, said Troup.
You may need to show to the CRA that you really can’t pay
Before agreeing to a payment arrangement, the CRA may want to see proof that you actually can’t pay your bill in full right now — because, wouldn’t we all rather make smaller payments over time, if we could?
According to the CRA’s website, “you may need to show that you have tried to pay your debt in full by borrowing money or reducing your expenses.”
And to make sure you can actually stick to your payment plan, the taxman may ask to see details of your income, expenses, assets and liabilities.
If you do owe interest and penalties, you may be able to get the CRA to waive them
If you do owe interest and penalties, in addition to tax debt you’re struggling to pay, you could try to plead for mercy with the CRA.
There is something called Taxpayer Relief Provisions, or cases when the CRA says it will consider making some exceptions to help out taxpayers in emergency situations.
“Inability to Pay or Financial Hardship” is one instance of such emergency situations. You’ll have to demonstrate that you’re really up against a wall financially, said Troup.
Reasons for the CRA to grant this exception “vary widely but some common ones are that the collection of the penalties and interest would result in a prolonged inability for the taxpayer to provide the basic necessities of life,” Troup told Global News.
This is a pretty high bar to meet, and you’ll probably need professional support to make your case.
And keep in mind that the best case scenario is the CRA waiving or cancelling your interest and penalties, not your tax debt.
“You can’t use these provisions to negotiate a better tax result,” said Troup.
To pay off your tax balance, set up a payment plan.
Other exceptions the CRA may grant you if you can show you really can’t pay
The CRA can also waive the deadline for filing, changing or cancelling a tax election. A tax election is a filing status that will result in an alternative tax treatment. So if filing, changing or cancelling a tax election would result in a smaller balance owing, the CRA may allow you to do so even if the regular time frame for doing so has elapsed.
Getting a refund or an adjusted return
Normally, you wouldn’t be able to ask for a refund after three years. However, the CRA will make exceptions in some cases. If getting the refund will reduce your tax burden, the taxman may waive the three-year limit, said Troup.
The CRA may grant you a similar exemption if you believe a reassessment of your taxes for a previous year would result in a smaller balance owing, said Troup.
If you believe the CRA made a mistake
The objection process
Supposed the taxman docked a deduction you really believe you are eligible for. If you disagree with the assessment or re-assessment of your tax return, you can object to it.
“As a taxpayer, you are entitled to an independent and separate review of your case with an appeals officer,” said Troup.
According to the CRA’s website, to file an objection, you can:
- Use the “Register my formal dispute” option in your online CRA account (My Account).
- Send a signed letter to your local CRA appeals centre.
- Complete and file a Form T400A, Objection – Income Tax Act.
When to get a tax lawyer
While a CPA can help you through the appeals process, if the sum under review is significant, you may want to turn to a tax lawyer.
“If the matter is complex or of financial consequence, it is often advisable to consult a knowledgeable tax lawyer who can help you navigate the dispute process, particularly if the dispute may ultimately end up in tax court,” said Troup.
Some tax lawyers mostly deal with tax and estate planning — you’ll want a tax litigator, a lawyer who specializes in dealing with the CRA in court, added Troup. In contrast, a CPA has little experience of court proceedings.