It could be bad planning or a miscalculation, but when you prepare your tax return, you may be in for a shock – you owe much more money than you can afford to pay.
It pays to be on time.
First things first – file on time. If it turns out that you owe tax for 2010 and do not file your 2010 tax return on time, the Canada Revenue Agency (CRA) will charge you a late-filing penalty. That penalty is 5% of your 2010 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. This can add up and compound your problem.
Nevertheless, if you file late you won’t be alone. A 2006 Decima poll suggested that 1 in 5 Canadians were late in filing their tax return. However, many of these people were getting money back rather than facing a bill, and therefore had no penalties for filing late.
What if you can’t pay?
There are options but time is critical.
- Liquidate your available assets (bank accounts, stocks, Canada Savings Bonds)
- Contact the CRA
1. Borrowing money
Time is short and with the impending penalties hanging over your head, you can use money from an existing line of credit. You can also speak with your bank about a loan or an amendment to your mortgage, but that could take time.
Although interest rates are currently low, this should be a short-term solution. Plan on repaying this amount as quickly as possible to minimize your interest charges. In the U.S., you can pay tax debt on your credit card. While Canadians might think that a credit card is the easiest way to pay, the Canada Revenue Agency does not accept credit card payments. Any payment must come from a bank account.
2. Liquidating investments
Hopefully you have some savings available “for a rainy day.” Transfer money from your savings account, cash in a Canada Savings Bond or sell securities that are not locked into an RRSP. You might want to wait until as close to the end of the month as possible if the savings are in daily interest accounts. Be aware that some savings accounts charge fees for multiple withdrawals in a month.
3. Relief from the CRA
If you can’t secure a loan or you have no access to investments or additional cash, your next step should be to call the CRA to help you devise a plan for paying your tax bill. The CRA works with taxpayers who, because of circumstances beyond their control, are unable to meet their tax obligations. A case worker will be assigned to you to determine how to rectify the situation. Taxpayer relief provisions permit the CRA to:
- Help taxpayers resolve problems that arise through no fault of their own; and
- Be more flexible and responsive to a taxpayer’s circumstances when it would be unreasonable or unfair to penalize the taxpayer
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