While filing an income tax return might be a financial win if you’re expecting a refund, it can be a huge source of stress if you’re one of the thousands of Canadians who have unpaid tax debt.
Blair Mantin, a Licensed Insolvency Trustee and Senior Vice-President at Sands & Associates understands better than most just how dire a situation can become when dealing with outstanding income tax debt. Every year his firm helps thousands of British Columbians negotiate reduced balances when people just aren’t able to pay.
Last year Canada Revenue Agency (CRA) disclosed that nearly half of the unpaid billions in tax debt they are owed is due from individual filers. Just how do so many Canadians wind up with tax debt every year? Blair joined Global News to share four common causes of tax debt, and what you can do if you’re unable to pay off the balance.
Watch the video clip here, and read more below:
Common Causes of Tax Debt
Cashing in RRSPs
One of the benefits to investing in RRSPs is that you are allowed to deduct the amounts invested from your income, which often means that you’ll get a tax refund in the year you contribute. When you withdraw money from your RRSPs, however, these funds need to be added to your income, which can trigger a balance owing.
- A base level of income tax is often withheld by the financial institution. The rate of tax withheld can vary based on how much you’re cashing in.
- The problem here is that the tax deductions upon withdrawal may not always be enough to cover what you owe at your tax bracket – you may need to pay more tax on the withdrawal when you file your income tax return for the year.
- This can mean that the amount of money you thought you had available from your after-tax RRSP withdrawal is significantly lower than you had predicted.
Tip: If you’re cashing in an RRSP be sure to set some of that money aside in case you need it at tax time!
Considering using RRSPs to pay off debt?
Talk to a Licensed Insolvency Trustee first – you may have better options to protect your assets and deal with your debts.
Working Multiple Jobs
For all standard employee jobs (i.e. T4 income) your employer typically deducts an estimate of your taxes owing based on your anticipated income throughout the year. The goal is that you have neither a refund nor a balance owing upon filing your return.
- It’s important to note that when your employer is calculating your payroll deductions, they’re normally doing so assuming that the income tax rate is based on those earnings alone.
- For anyone working multiple jobs (which is a large number of people in Vancouver!) it’s common to find that the taxes deducted at each job are not sufficient to pay the combined tax bill.
- This happens because as your earnings increase, a greater percentage of your salary needs to be paid into taxes. If each employer is deducting tax based on a salary of X, and your actual total income ends up at 1.5-2X, it’s almost certain you’ll have a tax balance owing for that year.
Tip: Discuss with your employer your total income and ask them to withhold a little more than usual on each paycheque. Worst case – you’ll get a tax refund at the end of the year if you’ve over-remitted!
In Canada it’s remarkably easy to become self-employed – unfortunately there’s no required ‘crash course’ in tax compliance, which often means that business owners learn by trial and error that the government requires compliance regardless of whether an individual knows the ‘tax rules’ or not.
- When you’re self-employed, there is nobody remitting CPP, EI and income tax payments on your behalf. For all income that you earn, you’re required to calculate and remit these payments to CRA.
- If you normally have to pay a lump sum to CRA, you may be required to make instalment payments throughout the year (i.e. monthly portions of your annual tax bill). Interest will be charged if you miss one of these required instalments.
- Avoid the impulse to postpone making remittances to CRA if money is tight, the government has powerful collection methods.
Tip: If paperwork isn’t your strong suit consider engaging the services of a bookkeeper or accountant to keep your taxes (and other paperwork) up-to-date.
(Collecting but) Not Remitting GST
For many self-employed individuals, they are required to step into CRA’s shoes and become a tax collector and remitter of GST payments.
- Self-employed individuals earning more than $30,000 in revenue each year are required to register with CRA and obtain a GST number to file GST returns and make remittances.
- There is only a very small number of professions where this is NOT required – in most cases, GST will be assessed against a self-employed person based on their sales, even if they failed to collect GST from customers. It’s important to know the requirements and to satisfy them from the start!
- Many business owners find themselves in hot water because they miss GST filing deadlines, or don’t have the money available to remit to CRA from the GST they collected.
- GST a business charges and collects is considered a “trust” amount, meaning that you are holding the money in trust for CRA.
- Interest and penalties compound daily with CRA, so even a modest balance can grow into a big stressor – quickly!
Tip: Avoid the temptation to use GST collected in the business if things are tight, CRA is quick to employ aggressive collection tactics on this debt.
What Can You Do if you Owe the Government Money?
If you owe money to CRA for your income taxes, GST, payroll or other balances – pay the balance in full on time, if you can.
If you’re unable to pay off your government debt in full or the bill has compounded over time, connect with a Licensed Insolvency Trustee as soon as possible. They can help you deal with the debt before it escalates further.
In Canada there is a single method of negotiating a balance owing to the government – filing a Consumer Proposal with the help of a Licensed Insolvency Trustee:
- A Consumer Proposal can effectively write-off virtually all debts including government debts (taxes, student loans and more) as well as general consumer debts. A Consumer Proposal can:
- Cut consolidated debt by up to 70-80% with no interest or fees;
- Stop all collection action, including a bank account freeze and even a wage garnishment.