What to do when you can’t pay your tax bill

Although we’re not even halfway through the calendar, 2020 has already been a year of significant financial upheaval and stress for millions of Canadians. The number of employed Canadians fell by one million during the month of March 2020 — and then by another two million during the month of April.

While the impact of sudden unemployment, or reduced hours, was mitigated somewhat by the availability of a number of federal and provincial benefits, those benefits can, at most, cushion the financial shock for Canadians who may not know when or if they will be returning to work.

Given the circumstances, it’s very likely that the number of Canadians who won’t be able pay their tax bill this year on time and in full will be significantly increased. Where resources are scarce most Canadians will, quite reasonably, allocate those resources first to the necessities of food and shelter. Even those who have the financial resources to pay their taxes in full may be reluctant to use up limited resources on tax payments when their employment and financial future are uncertain.

In most years, the filing and payment deadline for Canadian taxpayers (other than the self-employed and their spouses) is the same day — April 30. This year, a tax balance owed for 2019 doesn’t have to be paid until September 1. However, the filing deadline for individual income tax returns for 2019 is June 1, 2020, so taxpayers who have a balance owing for 2019 will know that by the beginning of June.

While, like most creditors, the Canada Revenue Agency (CRA) would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. If a tax bill can’t be paid in full out of either current resources or through private borrowing, the CRA is open to making a payment arrangement with the taxpayer, meaning that the amount will be paid over time.

There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 15000 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2018 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time.

In ordinary times, taxpayers who would rather speak directly to a CRA employee would be able to call the Agency’s Debt Management Call Centre at 1-888-863-8657, but that Centre is currently closed due to the pandemic. Taxpayers can, however, still complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.

The CRA also provides an online tool, in the form of a Payment arrangement calculator (available at https://apps.cra-arc.gc.ca/ebci/recc/pac/prot/welcome?request_locale=en_CA), which allows the taxpayer to calculate different payment proposals, depending on his or her circumstances). That calculator includes interest charges since, no matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2019 tax year which is not paid on or before September 1, 2020. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. For the second quarter of 2020 (April 1 to June 30), that rate is 6%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the September 1 deadline.

Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty of 5% imposed on the outstanding tax amount — and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In a worst-case scenario, the total penalty charges can be 50% of the tax amount owed — and that doesn’t count the compound interest, which is levied on all penalty amounts as well as on all unpaid taxes. Taxpayers are at least catching something of a break this year as the CRA has, in recognition of the unusual circumstances, indicated that although returns are due on or before June 1, late-filing penalties will only be assessed where a return is not filed by the payment deadline of September 1, 2020.

In all cases, regardless of the payment or filing deadline and no matter what the circumstances or amount owed, the right answer is to file one’s tax return on time and, if payment of taxes owed can’t be made, to get in touch with the CRA as soon as possible to make a payment arrangement.