Tax Repayment Plans: Navigating Options with the CRA
Dealing with tax debt can be overwhelming, especially when you’re faced with mounting interest and penalties. If you owe money to the Canada Revenue Agency (CRA) and cannot pay the full amount immediately, you might benefit from a tax repayment plan. These plans allow you to pay your tax debt in manageable installments while avoiding aggressive collection actions.
What is a Tax Repayment Plan?
A tax repayment plan is an agreement with the CRA that allows you to pay your outstanding tax debt in smaller, regular payments over time. While the CRA may request that you demonstrate financial hardship in certain circumstances, especially with trust accounts, generally, the key requirement is that the payment plan be reasonable. The reasonableness of the plan is determined by your financial situation, including your income, expenses, and ability to pay.
How Do Tax Repayment Plans Work?
When you arrange a tax repayment plan with the CRA, you will:
- Agree on a scheduled payment amount based on your income and expenses.
- Pay off your debt over an extended period, typically over a few months. Depending on the amount and the taxpayer’s ability to pay, the repayment period may vary.
- Continue to accrue interest. Interest will continue to accrue on the outstanding balance until it is fully paid.
- Avoid more severe collection actions. As long as you adhere to the plan and maintain consistent communication, you can mitigate more severe collection actions.
In cases of a prolonged repayment plan, the CRA may request additional financial disclosure over a specified period of time to evaluate your ability to pay and/or determine the appropriate payment amount. This includes disclosing:
- Your household monthly income and expenses;
- Your household assets and liabilities; and
- Supporting documentation for the above, including bills, invoices and bank statements over a specified period of time.
Who Qualifies for a Tax Repayment Plan?
The CRA may consider a tax repayment plan if:
- You are up to date with filing all your required tax returns.
- You demonstrate financial hardship or inability to pay the full amount immediately.
- You are willing to make consistent, reasonable payments.
- You cooperate fully with the CRA in providing financial information as well as maintaining consistent communication.
The CRA holds the discretion to reject your proposal if they believe you have the means to pay in full or if your payment offer is deemed unreasonable. However, if you do not agree with the CRA’s denial, you have the right to escalate the matter as necessary.
How to Set Up a Tax Repayment Plan with the CRA
- Contact the CRA Immediately
If you know you are unable to pay your tax bill, reach out proactively to discuss your situation. You can call the CRA’s Debt Management Call Centre at 1-888-863-8657 or use your CRA My Account to request a payment arrangement.
- Be Prepared to Discuss Your Finances
The CRA may ask you to provide a comprehensive financial overview, including:
- Income sources (employment, government benefits, investments)
- Monthly expenses (housing, utilities, groceries)
- Outstanding debts (credit cards, loans)
- Bank statements and pay stubs
Providing accurate and complete information is crucial to gaining the CRA’s approval.
- Propose a Realistic Payment Plan
The CRA expects your proposed payments to be reasonable and consistent. Calculate an amount that you can realistically afford without defaulting. Consider:
- Monthly income minus essential expenses
- Additional financial obligations (child support, medical expenses)
- Potential for increased income (seasonal work or bonuses)
- Set Up a Payment Method
The CRA offers several ways to make your payments:
- Pre-authorized debit (PAD): Automatically withdraws the agreed amount from your bank account.
- Online banking: Add the CRA as a payee through your financial institution.
- Credit card or PayPal: Through third-party services like Plastiq.
- Cheque or money order: Mailed to your local CRA office.
What Happens If You Miss a Payment?
Missing a scheduled payment can jeopardize your arrangement, leading to:
- Reinstatement of full debt collection with potential of legal action, and/or
- Interest charges and late penalties
If you know you will miss a payment, contact the CRA immediately to discuss your situation. They may allow you to modify the arrangement rather than cancel it entirely.
Consequences of Not Setting Up a Tax Repayment Plan
If you fail to arrange a payment plan and ignore your tax debt, the CRA can take drastic actions, including:
- Wage garnishment: Seizing a portion of your income directly from your employer.
- Bank account freezes: Placing a hold on your funds to secure the debt.
- Property liens: Securing a debt against your home or other assets.
- Withholding tax rebates: This includes any future refund on tax assessments.
- Seizure of assets: Taking property to cover the owed amount.
- Legal action: Pursuing a court order to enforce collection.
Alternatives to CRA Tax Repayment Plans
If your debt is substantial and a repayment plan is not feasible, consider these options:
Consumer Proposal
A legally binding agreement through a Licensed Insolvency Trustee (LIT) that allows you to settle your debts for less than the full amount owed by repaying a portion over a set period. The proposal requires approval by the majority of your creditors and is often accepted by the CRA if it offers a better outcome than bankruptcy.
Bankruptcy
While declaring bankruptcy can eliminate tax debt, it has severe credit implications and should be a last resort. It also does not automatically eliminate all types of tax debt, such as those related to fraud.
Why Consult a Tax Lawyer for Repayment Plans?
Navigating CRA repayment plans can be complex, especially if your financial situation is precarious. Working with a professional ensures that your rights are protected and that your repayment plan is realistic and sustainable.
Schedule a free consultation with Rosen & Associates Tax Law to discuss your tax debt and develop a repayment plan tailored to your situation.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Elias Zafiridis