When you owe money to the CRA
Controlling interest costs
Over 5.6 million returns filed as of May 27, 2019, had balances due averaging $5,244. Three things must be managed if you owe tax: interest on late payments; potential offsets and adjustments; and your relationship with the collections office.
Understanding the costs of paying late
When you owe money to the Canada Revenue Agency (CRA), acting promptly is important. The CRA starts charging interest starting the day following your tax filing due date. The interest charges themselves are very expensive. Currently the prescribed interest rate is 2%. However, because the government adds 4% to this prescribed rate on outstanding amounts you owe them, the actual interest rate charged is 6%, compounded daily.
For these reasons, it may be cheaper to borrow from the bank than to owe money to the CRA. You should enquire about this, do the math, and make informed choices about who your lender should be.
Interest or penalty relief is generally not granted by the CRA simply because you don’t have the money. It is always best to contact the collections department and make arrangements to pay over time to mitigate your interest costs.
Inability to pay or financial hardship
When collection activities have been suspended due to an inability to pay and substantial interest has accumulated, or will accumulate (or when your ability to pay requires an extended payment arrangement), relief may be granted to you by the CRA. If you can show that you have had a significant financial hardship, the CRA may waive all or part of the interest for the period beginning when you start making payments, until the amounts owing are paid.
A request for taxpayer relief may be made using Form RC4288: Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. But if you are granted relief or payment extensions, you must make the agreed payments on time and continue to comply with filing obligations.
Relief may also be possible when payment of the accumulated interest would cause a prolonged inability to provide basic necessities such as food, medical help, transportation, or shelter.
Look back for other forms of tax relief
Filing tax returns is never just a one-year affair. By taking a close look around you – 10 years back and several years forward – you will often find opportunities to recover previously paid taxes; or position yourself to save money in the future.
To illustrate, you can make adjustments to:
* The current tax return if missed a slip or forgot to make a claim.
* Prior filed returns, filed up to 10 years back to recover refunds from missed tax provisions, or up to three years back to apply capital or non-capital losses.
* Future tax returns to carry forward provisions like donations, medical expenses, political contributions, or unused capital or non-capital losses.
Use form T1-ADJ: Adjustment Request or use MyAccount to adjust online for up to 10 years back. Wait to get your Notice of Assessment first, however.
What if CRA owes you?
Unfortunately, the numbers and methodology on interest payments changes significantly when CRA owes you money. In fact, the CRA will only pay you interest (it’s taxable, by the way), at the prescribed rate plus 2%. There’s more bad news: interest is only paid on the latest of the following three dates: 31; the 31st day after you file your return; the day after you overpaid your taxes. That means if you file four years late and the government owes you $5,000, interest will only be paid starting from the 31st day after you file to the time you get your refund.
Be aware that CRA can also keep your refund in the following cases:
* You owe or are “about to owe” a balance to the CRA.
* You have a garnishment order against you under the Family Orders and Agreements Enforcement Assistance Act.
* You have any outstanding GST/HST returns from a sole proprietorship or a partnership.
* You owe money to any other federal, provincial, or territorial government, for example, on your student or immigration loans, or overpayments from Employment Insurance, social assistance or training allowances.
A tax specialist can help
Because the burden of proof for the numbers on your return is always on you, even if CRA has made a mistake, it is important to establish a relationship with a competent professional you can call on, should you have sudden trouble with the CRA.
These pros can go to bat for you in your relationship with the CRA, acting as your neutral and calm third party to enable important next steps. These may be negotiating payment terms and finding ways to maximize your filing rights over a period of years, if CRA makes adjustments to any of your tax returns. This includes the opportunity to correct any prior errors or omissions to prior filed returns, and potentially offset or wipe out a bill CRA says you owe.
© 2019 The Knowledge Bureau, Inc. All rights reserved. Used with permission.
Evelyn Jacks is the founder and President of Knowledge Bureau, which brings continuing financial education in the multiple areas of specialization to advisors and their clients. She is the author of 52 books on tax and wealth planning. This article originally appeared in the Knowledge Bureau Report. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.
Notes and Disclaimer
The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.