Pay your tax debt, then prepare for next year

Written by Vanessa Santilli on May 16 on

The tax deadline has come and gone, but many people still have yet to pay up, leaving them in tax debt. But by not paying what you owe to the CRA, you are digging yourself into a deeper hole. Here’s what can happen if you put off paying, and how you can preempt owing a large sum next year.

If you’re carrying income tax debt, you’re not alone. In fact, Canada Revenue Agency (CRA) spokesperson Cheryl Yeung has been quoted in multiple media outlets as saying that, for 2012, the outstanding income tax debt for all of Canada was $2.25

When you don’t pay your taxes, the CRA charges you interest. And don’t think about not filing at all in an effort to avoid paying, either: there’s a penalty fee for that, too, which increases with each month you’re late. If you’re putting off either filing or paying your tax debt, it’s vital that you take care action as soon as possible.

“Many Canadians do not understand the importance of filing a yearly income tax return,” says Mary Plahouras, a senior estate manager with MNP Ltd, home to government licensed trustees in bankruptcy and proposal administrators. “By filing your return on time, you are letting the CRA know your current tax situation. Without that information, the CRA cannot determine if you are still eligible to receive certain benefit payments.”

Filing and paying on time also means avoiding possible penalty and interest charges, or legal action by the CRA.

There is a difference between not paying taxes and not filing tax returns, says Frank Flynn, a former CRA complex case collections officer.

“[Not paying by the] deadline results in interest charges,” says Flynn. Late interest varies from month to month based on the prime rate. “However, it’s important to understand that the CRA calculates interest compounded daily, unlike the simple interest calculation most commercial lenders charge.”

The penalty for late filing is 5 per cent of the amount owing and an additional 1 per cent for each full month your return is late, to a maximum of 12 months.

What action can the CRA take?
“Any amount you owe is payable in full immediately when you’re assessed or reassessed,” says Plahouras. “If you do not pay the outstanding debt or contact the CRA to discuss payment of your debt, the CRA may take legal actions to collect the unpaid amount.”

According to Plahouras, the CRA can do any of the following:

  • Garnish wages;
  • Freeze and/or garnish bank accounts;
  • Seize any income tax refunds until you have filed all outstanding returns that need to be filed (and paid the tax you owe on those returns);
  • Have all or part of any money owed to you by other federal government departments, such as HST credits, sent to the CRA.

How to avoid a huge tax payment
While you can’t avoid paying your taxes, you can take steps to soften the blow. The most effective way to avoid a tax shock is to have a clearer understanding of roughly what must be paid in taxes at a particular level of income, says Flynn.

“If you’re a salaried employee incurring tax liabilities that you can’t pay, rework your budget to reduce expenses and include tax,” he says.

“You can ask to have tax — or more tax — deducted at source from employment income, pension benefits from an employer-sponsored pension plan and Old Age Security or Canada Pension Plan benefits,” adds Plahouras.

Contributing to an RRSP will also help, as your taxable income is reduced by the amount you contribute.

If you’re self-employed, it’s your responsibility to make sure that the [tax] money isn’t going into your general revenues with which you operate your business or household,” says Flynn.

Try setting up a separate bank account and paying your taxes monthly instead of quarterly or annually. This way, you avoid the temptation to spend what you should set aside, says Laurie Campbell, CEO of Credit Canada Debt Solutions.

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