It’s tax time again and you’re dreading filing your tax return because you still owe taxes from last year. On top of that, your debts continue to increase and it’s getting harder to make ends meet. You’ve considered bankruptcy but are unsure if it will clear your tax debt.
Similar to your other debts, taxes are generally dischargeable debts. That means the tax debt is forgiven in a bankruptcy or consumer proposal just like credit card debts and loans.
There are a number of reasons people find themselves owing significant tax debt – self-employed individuals can owe HST, source deductions, and personal tax; individuals who cash out their RRSPs to pay other debts find that not enough taxes were deducted; employees working more than one job find out they have a tax debt at the end of the year; or pensioners owing taxes for the first time in their lives because their pensions did not have enough taxes deducted.
Outside of a bankruptcy, tax debt is governed by tax law and Canada Revenue Agency (CRA) has more powers than other creditors to collect. CRA can charge penalties and interest on all overdue taxes, withhold child tax and GST credits, seize funds from your bank account, garnish your wages and/or put a lien on your house until the debt is paid in full.
Tax debt is serious but not insurmountable. There are steps you can take to understand your situation and then make a decision according to your individual circumstances.
1. Confirm what you really owe CRA.
2. Ensure you have filed all your outstanding tax returns. It is better to file returns on time even if you can’t afford to pay to avoid late filing penalties.
3. Review all your returns for the past several years to ensure you are taking advantage of all possibilities to reduce what you owe. You may want to get professional help from an accountant or tax preparation service.
4. If your non-payment was genuinely caused by a serious event beyond your control, consider applying to the Fair Practices Commission of CRA to have your interest and penalties cancelled.
Once you have a realistic picture of your total financial situation consider all solutions including a repayment plan with CRA. If you have more than just tax debts, consider talking to a Trustee in bankruptcy. A bankruptcy or a consumer proposal can erase many of your debts and give you a fresh financial start.