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What happens if I can't pay the income tax that I owe?

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What happens if I can't pay the income tax that I owe?

What If You Can't Pay Your Tax?

Image (c) Adam Lister / Getty Images

Question: What happens if I can't pay the income tax that I owe?

Answer:

First of all, even if you owe more taxes than you can pay by the income tax filing deadline, you should still file your income tax return on time to avoid late-filing penalties. (See the Income Tax FAQ "What happens if I don't file my income tax on time?".)

Once the CRA has processed your income tax return, they'll send you a Notice of Assessment. If the Notice of Assessment shows an income tax balance owing that you can't pay immediately, you should contact a tax services office, which will help you set up a mutually acceptable payment schedule. This page of the CRA Web site has links to tax services offices throughout the country.

It's important to let the CRA know about the problem and arrange a payment schedule as quickly as possible, because daily compound interest is charged on any unpaid income tax balance, starting on the annual filing deadline and continuing until you've paid the income tax you owe in full.

If you are in a situation where you are unable to meet your tax obligations through financial hardship or extraordinary circumstances you may apply to the CRA to have penalties and interest waived or cancelled through the Taxpayer Relief Program. Circumstances that may be acceptable to the CRA for relief from penalties include serious illness, loss of employment, natural disasters, etc.

While the CRA may forgive penalties and interest they will not generally negotiate lowering the amount of your tax bill.

If you are in a situation where you are unable to pay the full amount of taxes owed or meet a payment schedule you will probably need to consult with a bankruptcy trustee who can negotiate with creditors (including the CRA) on your behalf. If bankruptcy is the only option all debts (including taxes) can be forgiven.

If your business is incorporated and unable to remit taxes owed the situation is somewhat different. If your company is forced to file for bankruptcy the CRA has first priority on the company assets over all other secured creditors.  Company directors can also be held liable if there are unremitted source deductions (income tax, employment insurance, CPP) or unpaid sales taxes such as GST/HST.

See also:

Avoid Bankruptcy

How to Declare Bankruptcy

Small Business Bankruptcy vs. Personal Bankruptcy

Bankruptcy in Canada FAQs

As always, seek advice from your accountant, tax lawyer, or trustee before proceeding.

Back to > Canadian Income Tax FAQ Index

Back to > Small Business Canada FAQ Index

 

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