What to Do If Your Business Can't Pay Its Corporation Tax Bill in Canada

Tax is one of those things that can keep you up at night. This difficulty could stem from a variety of different reasons – perhaps the business wasn’t profitable enough the year before, or maybe your business is still feeling the effects of the COVID-19 pandemic.

In most cases, you already know when you file your tax return that you are going to owe the Canada Revenue Agency (CRA).  Or maybe, you already have a balance owing, and you are going to be adding more money to that balance, or possibly you have no idea whatsoever why it is that your Notice of Assessment (NOA) has a balance owing on it that you cannot afford to pay in full.

If that scenario arises, there are some key steps you should follow to prevent the CRA from taking immediate legal action. I apprehend that you are looking for a magical answer to make it disappear – unfortunately, there isn’t one, but that doesn’t mean it cannot be reduced or handled. Cooperation with CRA is essential and strongly recommended to make your life easier in the long run. They are always likely to listen to businesses that are struggling and are more likely to agree to a compromise if you have been upfront with them.

If you can’t pay your taxes the CRA may withhold tax credits as a means of recovering the outstanding tax debt. This can mean forgoing GST/HST tax credits, the climate action incentive payment, and other tax credits until the CRA has recovered the amount owed.

Realizing that you can't afford your tax bill can be shocking and incredibly stressful to think about. The good news is that enough people have been in your shoes to create a bit of a playbook.

Step 1: File Your Taxes Even if You Can't Pay Them

Even if you can’t pay all or part of what you owe to the CRA, you must file your tax return on time. Not filing is penalized harshly:

  • You’ll pay a 5% increase on everything you owe for filing a return past April 30th.
  • For each additional month after that, the increase rises by 1%.
  • Not filing in the calendar year will limit your ability to get government benefits in the future.

Step 2: Be Prepared to Prove Your Inability to Pay in Full

The second key to avoiding immediate legal action when you are unable to pay your tax bill in full is to be prepared to prove to the CRA that you are unable to make payment in full.

The CRA has access to a review of your tax file and determines whether they feel you are able to make payment in full or whether they will allow you to make incremental payments on a schedule – a payment plan.

The CRA will ask you for information relating to your income and expenses and use this information to determine your “Ability to Pay”.  Having timely and accurate information available can make the difference between a repayment arrangement and a garnishment or freeze on your bank account.

Once you can prove your inability to pay your tax bill in full, you should continue to keep communication lines open with the CRA. It is important to keep them informed of any changes in your income or expenses rather than waiting for them to find out first.

Step 3: Start the negotiation with the CRA. 

For any reason, if your finances present you with a tax bill that is too large to pay in full begin communicating with the Canada Revenue Agency instantly. The CRA likes to know that you are aware of the balance owed and that you have a plan in place to deal with it.  Even if you do not have a plan, this is the best time to ask the CRA for any possible options you can avail of. Request the  CRA to work out a payment plan. If you're unable to pay in full right away, the CRA will allow you to pay your debt in installments instead of all at once in a lump sum. You can set up a repayment plan either online or over the phone.

Keep in mind, that everything that you say will be added as a note in the permanent diary that the CRA has on you in their systems, so if you’re very rude off the get-go, then you can expect in any future dealings that your attitude might be brought up.

Step 4: Financially Recalibrate Yourself – Look for Other Sources of Income to Pay Off Tax Debt

Add up your assets, income, and liabilities to get a better idea of your current financial responsibilities. What, if anything, can you de-prioritize to free up money to pay your taxes?

If you haven’t already, consider creating an emergency fund for unexpected expenses like a tax bill. While you’re at it, ask yourself what else you might need to add or remove from your budget. Have any of your financial goals changed in recent years?

Step 5: Sticking to Your Payment Arrangement

Once you have reached a re-payment arrangement with the CRA for your balance owing, you must remain current on your tax obligations as they come due, or the payment arrangement is canceled.

That means, if you make a promise to pay an amount every month but forget that you need to make an installment payment, payroll remittance, or GST/HST payment, then you must notify the CRA of that error, and seek to adjust the arrangement.  Failing to do so, and missing a payment to keep up with the terms of the re-payment arrangement is a giant no-no.

If, after starting your repayment plan, your circumstances change and you can no longer afford the plan, you MUST contact the CRA to come up with a solution. It is important to communicate with the CRA if you are unable to make a scheduled payment due to circumstances beyond your control. If you don't the CRA will proceed with legal actions to collect the outstanding funds you owe. Proactive and upfront communication with the CRA sets the tone for the discussions that will follow with the CRA representatives or with your assigned collections officer.  Showing initiative and telling the truth almost guarantees an open dialogue and should something go awry during the period in which you are in collections, your good-faith bargaining should help quite a lot. Failure to do so can void the arrangement and will result in immediate legal actions being taken by the CRA.

Paying off one debt, while starting another is not allowed.

It All Starts with the Right Steps and Speaking to The Right Tax Professionals

Are you worried that you won't be able to pay the corporation taxes? Filing Taxes can take you through your finances, outline your debt relief options, and help you get your tax debt in order. Our experts can advise on how best to deal with this cut-throat tax situation. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances and ensure you comply with CRA reporting and payroll deductions.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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