Paying taxes is the biggest challenge many small businesses in Canada face. Business owners in Canada must file their income tax returns by April 30. For those who are self-employed, the Canada Revenue Agency (the CRA) extends the filing deadline to June 15, but it begins applying interest on the tax from April 30. If you want to file earlier, the CRA’s online NETFILE service is opened in early February each year.
What Should You Do if You Can’t Pay the Tax Debt in Full?
If you have a balance that you owe and you can’t pay it in full, you should contact the CRA as soon as possible as ignoring your debt will make financial and legal problems only worse.
To minimize the penalties, it is best to be proactive and approach the CRA to work out a solution that will help you pay what you owe in terms of taxes. Don’t ignore the debt just because they do not call immediately while they are processing and assessing your return. It always helps to be the first one to take action.
What Are Your Options if You Can’t Pay the Balance
If you cannot pay your balance, there are different options for you. You may qualify for the CRA payment arrangement or taxpayer relief.
A payment arrangement is an agreement that you enter into with the CRA that allows you to make smaller payments, until you have paid your debt, including interest.The CRA applies prescribed interest rates on your balance, which are updated every three months and are published on the CRA web site.
The CRA will only accept this arrangement if you can prove that you have made a reasonable attempt to obtain the necessary funds by borrowing or reducing expenses. To be eligible for the agreement, you will need to provide full financial disclosure, including information about your income, expenses, assets, and liabilities. You can do this by phone or by completing a financial questionnaire, but never by email (for security reasons).
However, it is essential to stick to the new payment schedule as if you miss a payment or filing tax returns, the CRA may suspend the arrangement and take steps to recover your debt.
You can set up a payment arrangement in three ways: through online pre-authorized debit, through the CRAs automated TeleArrangement or by speaking with a CRA call center agent.
Your business’ tax debt may include corporate income tax debt and deemed trust amount. If you have employees, the amount that you deduct and withhold from the wages of your employees is deemed trust amount. Also, if you are a sole proprietor, partnership, or corporation, the GST/HST amounts that you collect from your customers are also deemed trust amounts. Deemed trust amounts cannot be used as cash flow and must be paid in full.
The CRA will work with businesses that struggle to pay their corporate income tax debt or deemed trust amounts. However, if you struggle to pay life necessities like housing, food, utilities as a result of the debt repayment, you may be eligible for help under the financial hardship provisions. Note that it is your responsibility to contact the CRA if repaying your tax debt is causing you financial hardship.
Alternatively, you may qualify for tax relief from penalty or interest. The CRA can approve a tax relief when the following types of circumstances prevent a taxpayer from meeting their tax obligations:
- extraordinary circumstances like natural or human-made disasters, civil disturbances or disruptions in services, serious illness or accident, serious emotional or mental distress like a death in the immediate family.
- actions of the CRA like errors and delays in processing
- inability to pay or financial hardship: if there is a confirmed inability to pay the CRA may consider canceling interest in whole or in part
- other circumstances
It is essential to keep in mind that it never pays not to file a tax return or to file a late return just because you cannot pay your balance in full. That way you will have to pay a late-filing penalty fee which is equal to five percent of your balance due plus one percent of your balance for each full month your return is late, up to 12 months.
Also note that the CRA will never settle debts outside of bankruptcy or a proposal, and the goal of neither Tax relief program nor CRA payment arrangement is to settle a debt. There are only two cases in which the CRA will accept less than the full amount owed for taxes, and that is if you file for bankruptcy or a Consumer Proposal through a Licensed Insolvency Trustee. If you owe a significant amount of money for an extended period of time, the CRA may put a lien on your home. Liens are considered secured debt and secured debts do not get canceled through bankruptcy or a consumer proposal.
Tax Debt Loans
Instead of working out your tax debt with the CRA, you may take out a loan to pay the CRA balance. Our website is the perfect source to find business loans as well as various funding options if you choose this alternative. If the rate on such a loan is better than the arrangement you can get from the CRA (including the prescribed interest rate and penalties), it makes sense to go this route. Note, however, that banks are usually not willing to extend an unsecured loan for tax debt, so you will probably need to provide collateral or to take a personal loan which tends to have higher rates. There are also private lenders that unlike large banks and larger alternative lenders, are more willing to work with businesses who have tax debt issues and approve them loans solely on the equity in the property.