Tips for Managing Tax Debt: Over 7 Million Owe Nearly $7,000

Evelyn Jacks

As Canadians face both soaring temperatures and a summer of rising prices, there is another hot issue emerging: tax debt. Of the 28 million returns filed as of June 13, just over 7 million of them had an average tax debt $6,739.  With the proprietorship deadline of June 15 ending last week, this tax debt – and the number who owe it could increase. It’s the first type of debt to pay attention to.  Here’s why:

The Facts:  $47.4 billion dollars is owed.  The interest on that debt is calculated every three months at the prescribed rate (2% as of July 1) plus 4% more, for a total of 6% in the next quarter. Worse, the arrears interest itself is compounded daily on any unpaid balance from your balance due date for the return to the date of payment.  The taxes are owing on top of this, of course.

Depending on the circumstance, interest compounding daily at 6% can quickly add up to more than the taxes themselves.  There are several lines of defence that can lessen the blow, however.

First, CRA will cancel interest or penalties that are $25 or less when taxes owing are paid in full. That’s an important first start.  If a future adjustment is processed, the cancellation will be reversed, however, and the account will be “reviewed” according to the CRA.

As second important line of defence is to pay interest and taxes shown on the Notice of Assessment or Reassessment in full by the date specified. If that happens, additional interest from the notice date to the date of payment will be waived.  So, it is very important to review those notices and pay up the balances.  

What happens if you can’t pay?  First line of defence:  pay as much as you can as soon as you can.  After this, it’s possible to make arrangements with the CRA to pay overtime, based on ability to pay.  You’ll still have to pay interest costs, when this option is chosen, however. CRA has developed some new tools to figure out your tax payments over time, together with your tax specialist:

• The Payment Arrangement Calculator (PAC) and
• The Monthly Net Income and Expense Worksheet (Worksheet)

Important tip:  the Ostrich Approach is the wrong strategy.  Doing nothing will lead to legal action by the CRA, who can apply to:

• Garnish wages and require the employer to send the money under a Requirement to Pay
• seize and sell the taxpayer’s assets
• Use other means, including the offset of various tax credits and refunds in the future until the debt is paid

For these reasons, it may be less expensive to pay the tax debt with a line of credit or with assets that are the most tax efficient; a TFSA, for example rather than an RRSP, which will cause a tax liability the next time the return is filed. 

Bottom Line:  Tax debt requires a financial triage and proactive management immediately.  Check this out with your tax specialist and work together with your financial advisor to get the best after-tax results.  Remember, what matters is what you keep.