Back taxes are taxes that were not paid in the year in which they were due. For example, taxes that are due in 2015 but are not paid in 2015 are considered “back taxes.” This situation is also called “being in arrears.” Unpaid taxes can be a serious problem for those who do not have the money to pay their tax debts. This is because you can be charged significant interest and penalties on these debts.
The Canada Revenue Agency (CRA) charges a late filing penalty on income tax returns that are filed after the filing due date. The CRA also starts charging compound daily interest on outstanding balances starting the day after your taxes are due. For example, most people are required to file and pay their taxes by April 30th of the following year (e.g. 2015 taxes are due on April 30th, 2016). This means that the CRA starts charging interest on May 1st.
The CRA has strong powers that it can use to collect taxes. In addition to charging interest, if you do not pay what you owe, the CRA can withhold tax credits (such as child tax credits and GST/HST tax credits) and it can even take steps to garnish your wages.
If you cannot pay your taxes or if you have outstanding back taxes, you can contact the CRA and speak with their Debt Management Call Centre. You may be able to work out a payment arrangement and develop a plan that can help you pay your taxes.
However, it’s important to note that the CRA will not reduce the overall amount owing on your taxes unless you can prove that specific hardships prevent you from paying. The applicable hardships include CRA errors, natural or human-made disasters, financial hardships, civil disturbance, death, accident, and various other issues. However, even in these cases, while interest and penalties may be waived, it does not reduce the overall amount of tax owing.
It’s also important to note that the CRA wants a person to have made reasonable attempts to pay their taxes before the agency will negotiate. You should always try to pay as much as you can on time. Not only will not paying lead to various penalties and collections processes, but the CRA wants to see that you are doing your best and that you are cooperating with them as much as you can. If you do not, the CRA can garnish wages, seize assets, hold another party jointly responsible for your debt (such as a spouse or business partner) or legally register your debt in the Federal Court of Canada.
As you can see, failing to pay back taxes can have serious consequences. For more information on what you can do if you are unable to pay your taxes, please contact us at 1-888-868-1400 to speak with a qualified professional at Tax Solutions Canada and learn more.