It's Tax Season - What to Know About Income Tax Debt Settlements
With this year’s tax deadline quickly approaching, are you prepared for any income tax debt you may owe?
Many Canadians find tax return time stressful because they haven't planned for potential income tax debt owed to the Canada Revenue Agency (CRA). By keeping tabs on your expenses, liabilities, and income earnings, you can be in a better position to handle income tax debt settlements.
Let’s consider the ways you can prepare for income tax debt and what solutions are available if debt repayments are becoming a greater challenge.
Determine How Much Income Tax You Owe
One of the most important things you can do when preparing for your income tax return is to get organized. You’ll want to ensure that you are up to date on your income tax returns to determine if you owe outstanding amounts from previous years.
You’ll also want to review your expenses to determine what you can claim on your income tax return. If you are uncertain of what deductions you are entitled to, we recommend speaking with a tax professional. They can review your claim to account for all possible deductions.
If you own a small business, you may be especially worried about how much income tax debt you owe. A common misstep is not setting aside income throughout the year, which leaves you at risk of not being able to make a payment to the CRA. It can be hard to know how your business will be in a year’s time, so it’s better to set aside what you can well before the tax deadline. In addition, set aside any HST you collect as you receive it to avoid owing a significant amount by income tax time.
We also want you to be aware of the tax debt you’ll owe if you received the Canadian Emergency Response Benefit (CERB). When the CERB payments were issued, no taxes were taken off. If you collected CERB during 2020, you will be responsible for owing taxes on the payments you received. If you meet certain eligibility criteria for COVID-19 benefits (such as CERB), you may receive interest relief on CERB taxes owing for 2020. However, taxes should still be filed on time to avoid any late penalties.
File Your Income Tax on Time
If you anticipate that you will owe income tax, it’s still important to file your tax return before the deadline because the CRA charges a penalty. The late-filing penalty is 5% of the 2020 balance you owe, and an additional 1% for each full month your tax return is late up to 12 months.
For individual tax returns, the deadline for filing is April 30, 2021. If you or your spouse are self-employed, the deadline to file is June 15, 2021; however, if you have a balance owing, this must be paid by April 30, 2021, to avoid interest charges.
Debt Payment Options
Fortunately, if you owe tax debt and cannot pay by the deadline, the Canada Revenue Agency offers debt payment options.
The first step is to contact the CRA if you are unable to make a full payment. You have the option to make a partial payment where the remaining amount will have interest applied. You will need to set up a payment arrangement with the CRA to make payments over a set period until the debt is paid in full, including interest. In this arrangement, the CRA will review your financial situation to determine if you have made an effort to pay the full amount of your debt, such as lowering your expenses.
You may also be eligible for taxpayer relief provisions that waive interest and late-filing penalties. To be considered for this relief, you need to prove that your inability to make debt payments is due to serious circumstances or financial hardship. This relief cannot be applied to the income tax debt you owe.
Debt Resettlement Options
If these debt options are not enough to improve your current financial situation, we encourage you to speak with a Licensed Insolvency Trustee (LIT). Our LIT can help you find possible income tax debt solutions to reduce your financial burden.
A Licensed Insolvency Trustee can help you determine if a consumer proposal may offer debt relief. In this process, the LIT will work with you to prepare a proposal that outlines how you can plan to repay a portion of your outstanding debt to the Canada Revenue Agency.
Contact our Licensed Insolvency Trustee today to learn about the debt relief options that can help you move forward in 2021.