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05/01/2018 13:07 EDT | Updated 09/12/2018 15:38 EDT

So You Can’t Pay Your Taxes To The Canada Revenue Agency — Now What?

Be sure that you file your tax return on time even if you cannot afford to pay even $1 of your tax liability.

The personal tax filing deadline for most Canadian taxpayers who have T1 tax forms just passed. If you have self-employment income, the filing deadline is June 15. This means that tax returns have to be filed by midnight on those respective dates.

If you don't file your taxes on time, you face a number of penalties from the Canada Revenue Agency (CRA). For starters, you face an automatic 5 per cent late filing penalty, plus an additional 1 per cent penalty for each additional month you're late, to a maximum of 12 months. If you have amounts owing from previous years, CRA will continue to charge compound daily interest on those amounts.

What do you do if you can't afford to pay your tax bill? Many people either don't file, don't file on time or ignore the Canada Revenue Agency (CRA) altogether. This is a huge mistake!

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Sticking your head in the sand doesn't work with the CRA.

Be sure that you file your tax return on time even if you cannot afford to pay $1 of your tax liability. Tax payment is in some ways divorced from tax return filing. If you submit your T1 tax return by the due date, you avoid the late filing penalty even if you submit no payment when the return is sent in.

On the other hand, failing to file the T1 not only incurs the late penalty, but also involves CRA compliance officers whose job it is to ensure all taxpayers are onside with their tax return filing requirements. Not submitting on time compounds tax problems, and isn't a coping mechanism.

Of course, if you owe taxes, they will still have to be paid after your return is filed, but that isn't an immediate problem. The size of the tax debt determines how aggressive CRA will be and how quickly they will contact you for payment arrangements.

Larger tax debts require prompt attention

A small tax debt, in the low thousands, will normally not generate much collection action. While the taxes owing will continue to attract compound interest, they won't usually attract prompt collection officer attention. Form letters will be sent out regularly, and if no payments are made at all, a collection officer will normally be assigned. Regular monthly payments that pay off the debt will solve the problem with no further CRA intervention.

Larger tax debts require prompt attention. As soon as a return is filed, an automatic letter will be sent inviting the taxpayer to pay the taxes owing or to contact the CRA. It's important to proactively respond to this opening salvo. Depending on the size of the debt, a reasonable monthly payment arrangement may be acceptable to the CRA.

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If the debt is large, then monthly payments, unless they repay the entire amount in less then one year, will be rejected. A tax professional will be needed to try to negotiate a payment arrangement that will be satisfactory to a CRA collections officer.

If CRA collection attempts are ignored, or if an arrangement is not concluded, the CRA will use their draconian collection powers. This includes the ability to seize money in your various bank accounts, garnish salary and put a lien on houses or real estate you may own.

But remember: by filing your return on time, you avoid an immediate 5 per cent penalty, and you can deal with the collections issues in the months to come.

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