Solutions to Income Tax Debt Problems

Once you have completed your income tax return, you may discover that you owe income tax debt. However the amount due might be such that you cannot really see how you will manage to pay it back. Your own calculations and budget revisions may show that you will be unable to pay the balance owing on or before the deadline. So what can you do?

Note: This post was updated on March 26, 2018.

Make an arrangement with the Canada Revenue Agency and Revenu Québec to repay income tax debt

If you are facing income tax debt that you cannot repay, you are not alone. According to the Canada Revenue Agency (CRA), 1 out of 10 Canadians with income tax problems does not reimburse his or her debt on time. Fortunately, the CRA and Revenu Québec provide taxpayers with some measures to facilitate the reimbursement of their income tax debt.

Payment arrangements

Under particular circumstances, the CRA and Revenu Québec may accept to enter into a payment arrangement with taxpayers. Therefore, if you cannot pay your income tax debt, contact these organisations to check if you are eligible to such a measure. This type of arrangement may enable you to reimburse your debt through several installments.

Needless to say that you will be required to comply with this arrangement, failing which it could be cancelled. In the event of a default on your part, recovery procedures may furthermore be initiated against you to recuperate the outstanding amount.

Relief provisions

The CRA and Revenu Québec sometimes agree to alleviate income tax debt. They could therefore cancel interest charges of a taxpayer if he is unable to reimburse his or her income tax debt without compromising the satisfaction of some basic needs, that is:

• shelter;
• food;
• travel;
• medical care.

Obviously, such exemptions are very rare. They are only granted in exceptional cases.

Alternatives to repay income tax debt

Contrary to a widespread myth, income tax debt can be included in a consumer proposal or a bankruptcy. Therefore, such alternatives may be considered if you do not succeed in your negotiations with the CRA or Revenu Québec.

Consumer proposal

The consumer proposal is a settlement offer made by a debtor to his creditors. This alternative allows to eliminate income tax debt as well as any other debt with unsecured creditors. The latter debts refer to cases for which no lien has been registered by the lender — a credit card debt for instance. In contrast, mortgages are debts with secured creditors.

The consumer proposal is characterised by the following elements.

• The Licensed Insolvency Trustee (LIT) who administers of the consumer proposal determines your true capacity to repay your debt.
• The LIT writes the consumer proposal and presents it to the creditors, including the RCA and Revenu Québec.
• The consumer proposal is a settlement offer that corresponds to a percentage of your entire debt.
• If the offer is accepted by the creditors, you will be required to make only one monthly payment to reimburse all the debts referred to in the consumer proposal.
• Once the conditions defined in the consumer proposal are met, the debtor’s income tax debt is eliminated. All other debt referred to in the proposal are also wiped out, even though the total sum of the reimbursement will cover only a fraction of the amount of the debts.
• Recovery procedures (threats, seizures, etc.) are suspended and the accrual of interests ceases.

Bankruptcy

Bankruptcy is a last resort measure. When no other alternative is applicable, it is still possible to resort to bankruptcy to eliminate income tax debts.

The bankruptcy procedure is characterised by the following elements.

• The Licensed Insolvency Trustee takes charge of the procedure and contacts your creditors.
• In a bankruptcy procedure, some assets are exempt from seizure.
• Assets which are not exempt from seizure are sold by the LIT; the proceeds of their sale will be apportioned between the creditors.
• You will be required to make only one monthly payment, directly to the LIT. These payments will be used to reimburse your creditors.
• Based on various factors, the monthly instalments will be spread over a period of 9 to 36 months.
• Once the conditions are met, you will be discharged from bankruptcy and benefit from a fresh new start, free of debt.

Take the first step

The worst thing you can do if you owe income tax debt is to ignore the problem. Contact the CRA and Revenu Québec without delay to talk about your situation. Try to enter into a payment arrangement or to apply for a taxpayer relief. If you do not succeed, contact a Licensed Insolvency Trustee. A LIT will be able to suggest various ways to pay your income tax debt. The first consultation being free, you have everything to gain.