WHEN YOU OWE MONEY TO THE CANADA REVENUE AGENCY
The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.
Those reasons start with the interest cost of carrying such debt. Even with the recent increase, interest rates remain near historic lows, but the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For the third quarter of 2017, therefore, covering the months of July, August, and September, the interest rate charged on taxes owing is 5%.
While that 5% rate is still lower by far than, for instance, the interest rate charged on many credit card balances, it is the interest calculation method used by the CRA which can really inflate the interest cost of having tax debts. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly.
The CRA also has a very broad range of options at its disposal to compel payment, and a very long period of time in which to use them. Where a taxpayer hasn’t paid an amount owed within 30 days after he or she receives a Notice of Assessment stating the amount owed, the CRA will usually contact the taxpayer, by phone or by mail, with a request for payment. If the taxpayer does not contact the CRA to make a payment or set up a payment arrangement within 90 days after the date the Notice of Assessment was mailed, the CRA will likely resort to its other collection options.
The CRA has the right, where there are any amounts owed to the taxpayer by any other department of the federal government (for example, a goods and services tax credit amount) to, in effect, seize those amounts and apply them to the tax debt. The CRA also has the authority to intercept (or garnish) money which may be owing to the taxpayer from a third party, like an employer and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.
Of course, the CRA’s goal, like that of any other creditor, is to get the debt paid without having to resort to expensive and time-consuming administrative or legal processes. It’s relatively rare for a tax debt to reach the stage of litigation or garnishment, as it is in everyone’s interest to resolve matters before things reach that point. And, perhaps contrary to popular belief, the CRA has some flexibility. When the amount of taxes due on filing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact.
Not surprisingly, the CRA tries to make it easy for taxpayers to contact it to make such arrangements. Taxpayers can use the CRA’s automated TeleArrangement service at 1-866-256-1147, for which it is necessary to provide one’s social insurance number and date of birth, and the amount which appeared on line 150 from the last return for which a notice of assessment was received. TeleArrangement is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time. For those who wish to speak to an actual representative of the CRA, a toll-free telephone line (1-888-863-8657) is staffed by agents from Monday to Friday, except on statutory holidays. The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily.
The alternative to making a payment arrangement and becoming subject to the CRA’s punitive interest assessment practices is sometimes to borrow the required funds from a third party and pay the CRA in full as soon as possible. Especially where the taxpayer can provide some security — like the equity in a home — it may be possible to borrow funds at less than the 5% interest rate currently being charged by the CRA on overdue tax amounts.
One final blow: interest paid on tax debts, whether paid to the CRA or to a third party lender, is not deductible from income.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.