A Guide to Tax Debt

What is tax debt?

Why do I owe on my income tax return?

What are my options to deal with income tax debt?

How do I know which option to consider?

What can CRA do to get what they’re owed?

How do I pay back my CERB benefits?

What are my options if I can’t repay my CEBA loan?

What is tax debt?

Most of us are accustomed to seeing income tax payments on our paycheques but it’s not always clear how that can translate to tax debt. The government taxes individuals and businesses and then uses everyone’s collective tax contributions for various services and infrastructure. Each person’s tax amount is different, based on their income.

The payroll deductions you see on your paycheques are an estimate of what you should owe when it’s time to file your annual taxes, assuming your current income will remain the same throughout the year.

If you haven’t paid enough taxes based on your income when it’s time to file your return, you will end up with an amount owing — your tax debt.

Why do I owe on my income tax return?

Generally, the payroll deductions on your paycheque are accurate for most salaried and hourly employees — aside from any significant changes to employment status, income, or investments — which is why comparatively few have a significant balance owing at tax time.

But, there are several reasons why your tax deficit can build up quickly.

• If your deductions are not in line with your annual income
• If you are not regularly remitting income taxes to the CRA
• If you are miscalculating your total annual tax burden and/or failing to set enough money aside to pay your taxes
• Neglecting your taxes for several years can generate a similar, seemingly insurmountable deficit.

Salary or hourly employees with responsible employers generally don’t have to worry about these oversights. But for many self-employed individuals, investors, and CERB recipients, these shortcomings can leave you with a hefty bill come tax time.

What are my options to deal with income tax debt?

Owing the government money can be very intimidating as it's assumed the government has a limitless ability to collect the debt through any means necessary. Many people worry this debt will result in loss of income and an inability to meet daily household expenses if the government cuts off their income or benefits.

While it is true that the Canada Revenue Agency (CRA) can charge penalties, withhold certain government benefits, freeze your accounts, and garnish wages, at the end of the day, the CRA wants the same thing as you — paying off your tax debt. There are options available to you, depending on your financial circumstances and the amount you owe:

Payment arrangements

If you’re unable to pay your outstanding income tax debt as a lump sum, reach out to CRA as soon as possible. Explain your financial situation and propose a reasonable amount you can afford to pay every month. Being proactive can help avoid significant interest and other penalties for non-payment.

Consolidation loan

If you can’t make a favourable arrangement with CRA, reach out to your bank or another private lender to discuss options for a consolidation loan. This would effectively allow you to pay off the income tax debt, plus combine any other outstanding debts into a single monthly payment. Just remember the goal here is to make your debt more affordable. If you cannot find a better interest rate than what CRA is charging, it is likely not beneficial to consolidate just to eliminate an income tax debt.

Bankruptcy or Consumer Proposal

If your income tax debt has put you in a position where you can’t afford the payments and your other monthly expenses, the Bankruptcy and Insolvency Act (BIA) can likely deliver the relief you need. Income tax, GST, payroll source deductions (e.g. CPP, EI), and debts owing to Canada Mortgage and Housing Corporation may all be included in a Bankruptcy or Consumer Proposal.

How do I know which option to consider?

MNP offers free confidential consultations to individuals who are struggling with unmanageable debt and need a financial fresh start.

During this no-obligation initial meeting, a Licensed Insolvency Trustee will review your entire financial situation, including your outstanding debts, income, and income tax situation.

They will use this information to outline all your options in detail and provide you with an unbiased recommendation to help you deal with your debts.

Why Consumer Proposal?

A Consumer Proposal may be your best option when dealing with CRA if you’re financially able to make payments but can’t afford the entire amount owing.

Depending on your situation, the Licensed Insolvency Trustee will likely be able to negotiate a reduction in the total value of the debt — in line with your household budget — and stop any ongoing interest.

Payment of your Consumer Proposal could be a single lump sum, or monthly payments over a period of up to five years. Once you complete your payment arrangements and fulfill your duties you will be released from your debt.

Why Bankruptcy?

A Bankruptcy may be your best option if you:

• Have an excessively large amount of debt
• Don’t own a large number of realizable assets
• Don’t earn enough to make a Consumer Proposal that your creditors would be likely to accept
• Don’t expect your income situation to change over the next year

What can CRA do to get what they’re owed?

The CRA does have the ability to take collection measures without having to go through the court system. For example, they can:

• Garnish your wages
• Put a freeze on your bank account and seize the funds on deposits
• Withhold certain tax credits such as GST refund cheques or the Trillium benefit to pay down the debt owing
• Arbitrarily assess any income tax returns not yet filed and apply penalties and interest to the debt owing
• File a lien on your property that would ensure the debt is paid if the property is sold.

How can I avoid these actions?

The CRA usually takes these measures when they are unable to come to an agreement with an individual tax filer or the tax filer disregards their statutory obligations under the Income Tax Act. This may mean failure to file income tax returns or other tax documents such as GST/HST returns.

The first thing you’ll want to do is file any outstanding tax documents and continue to file your income tax returns on time each year. This will show CRA that you are trying to improve your situation by complying with the tax laws. It also helps you determine the amount of debt owed in total.

This knowledge is important for two reasons. First, you can't plan how to get out of debt if you don't know how much you owe in total. Second, you need to figure out how much you should be setting aside each month for next year's income tax debt so you don’t continue to have debt owing year after year. Setting aside the money for future income tax debt will help stop the cycle of debt.

After your returns have been filed, be proactive and contact CRA to make payment arrangements. The CRA may ask you to provide various documents to help them determine a suitable monthly payment. This may include an income and expense statement that outlines your other financial obligations.

Cooperation with this process will usually result in a reasonable arrangement. Expect to sacrifice the extra things in life, such as recreation or vacations, to get this debt under control. 

And finally, make sure you stick to the payment plan that was agreed upon. If you can't make a payment, make sure you contact CRA to discuss the missed payment and any changes to your circumstances. The CRA wants to see a concentrated effort and compliance with the income tax obligations.

It’s never to late to reach out for help and work towards becoming debt-free. For more information on how to repay government debts and to learn more about the options available to you, reach out to an MNP Licensed Insolvency Trustee.

How do I pay back my CERB benefits?

The government introduced CERB payments during the COVID-19 pandemic to provide $2,000 for each eligible four-week period to Canadians who were unable to work during lockdown.

The program was rolled out quickly to respond to the urgent situation. Many people signed up without understanding if they met the eligibility criteria and collected payments they were not eligible to receive. Some people also received multiple payments by mistake.

If you are one of those many Canadians, the government may now be requiring that you repay the full $2,000 for each four-week period that you were not eligible to receive it.

You can pay back your CERB overpayments in full or over a period of time. The CRA does not charge interest on COVID-19 benefit debts and can help you arrange a repayment plan. The repayments can be made to the CRA online, by mail, or in person.

If you are struggling to pay back your CERB benefits, don’t hesitate to reach out for help. MNP Licensed Insolvency Trustees can help you review all your options to choose the solution that works best to help you manage your CERB repayments and achieve a debt-free future.

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What are my options if I can’t repay my CEBA loan?

Nearly 90,000 businesses were approved for a CEBA loan since it was introduced in 2020. The loan offered small businesses and non-profits up to $60,000 interest free over the course of the pandemic years. Almost $50 billion in total funds were approved for CEBA loans and loan expansions (a $20,000 boost from the original $40,000 that was offered).

This January, that debt came due, and many businesses are struggling with how they will repay the government amid ongoing financial constraints.

Find out everything you need to know about CEBA loans and your repayment options.