Read this first
This page explains your options. It will not push you toward a form. If you have received a legal notice, speak to a lawyer or a Licensed Insolvency Trustee as well.
Who this is for: Canadians who owe income tax or similar amounts to the CRA, with or without a notice of collection, and are wondering whether to borrow against their home to clear it.
On this page
Owing the Canada Revenue Agency has a particular kind of weight. The letters come with legal language, the interest does not stop, and the agency has powers that most creditors do not. It is also an agency that, by its own published policy, works out payment arrangements with people who cannot pay in full. This page is general information, not tax or legal advice.
What a CRA debt means
A CRA debt is money owed after an assessment, usually income tax, plus interest and sometimes penalties. The agency’s collections policy says interest accrues at the prescribed annual rate until the amount is paid in full, compounds daily, and applies to both tax and penalties. The prescribed rate can change, so the CRA’s own site is the place to check the current figure.
Because the agency can act through a Requirement to Pay, early contact matters more here than with most debts.
The timeline and rules
The collections policy sets out several points worth knowing. Certain actions, such as starting court proceedings or issuing requirements to third parties, normally cannot begin until 90 days after the notice of assessment or reassessment is sent, with listed exceptions. If you do not pay voluntarily, the agency may garnish wages or other income through a Requirement to Pay, seize and sell assets, or use other means the law allows. A certificate registered in the Federal Court has the same effect as a court judgment, and you must pay the reasonable costs the agency incurs to collect.
Once a Requirement to Pay is issued, the policy says it is usually not withdrawn until the account is paid in full or it is shown to cause financial hardship. That makes the weeks before one is issued the cheapest time to act.
What you can do now
Call the CRA before anything is seized. The agency says that if you cannot pay in full and can explain your situation, a collections officer will work out a plan based on your ability to pay. Have your income, expenses, assets and liabilities ready, since you may need to prove them. If your circumstances change, call again, and if you disagree with the officer’s decision you can ask to speak to a supervisor. If you cannot pay because of circumstances beyond your control, the policy says the agency may allow payment to be postponed, although interest and penalties keep accruing.
An archived CRA tax tip adds a practical point: the sooner you act, the less interest you pay. It also notes that an arrangement can be set up through My Account, by pre-authorized debit, or by calling.
Meanwhile, file any returns still outstanding and make a realistic budget. A plan you can keep is better than a bigger one you cannot.
Who to speak to first
A Licensed Insolvency Trustee is the most useful early call when a tax debt sits alongside other debts. The Office of the Superintendent of Bankruptcy says a consumer proposal is available when total debts are $250,000 or less, not counting a mortgage on your main home, and that once it is filed you stop paying unsecured creditors and garnishments and lawsuits are halted. The page does not say whether tax debts are included in a proposal or bankruptcy, so ask the trustee directly, and do not assume.
An accountant or tax lawyer can help if you believe the assessment is wrong, since the policy also describes objections and appeals. A non-profit credit counsellor can build a budget, and the Financial Consumer Agency of Canada says talking to one will not affect your credit score. A counsellor has no power to stop a creditor’s collection actions.
The ways this can end
Most tax debts end in one of four ways. You pay in full from savings, asset sales or borrowing. You pay through an arrangement over time. You resolve it as part of a proposal or bankruptcy with a trustee, if the trustee confirms that it applies. Or, if you ignore it, the agency collects through garnishment, seizure or a registered certificate.
Each has a cost. Paying early saves interest. An arrangement keeps your cash flow but costs interest. A trustee process has fees and effects on credit that the trustee must explain.
Where a second mortgage fits, and where it does not
A second mortgage turns a tax debt into a loan secured on your home. The worked example shows the trade: in that case it costs about $3,390 more in year one than staying on a CRA arrangement. You are exchanging an agency that offers arrangements for a lender that can enforce against the house.
It can fit when collections are imminent, the arrangement the CRA offers is not affordable, and the second mortgage payment is something your budget can carry through the whole term. It does not fit when the tax debt grows each year because income cannot cover tax, since the loan fixes the past and not the future.
Ask a licensed mortgage professional for the total cost in dollars and the date the loan comes due, and test it with the calculator. If several debts are involved, read how consolidation works before you decide.
Keep the paperwork straight
Whatever you decide, keep a folder. Include each notice of assessment, every letter from the CRA, the dates and names from your calls, and proof of each payment. If you later ask for a supervisor to review a decision, or you work with a trustee or accountant, a clean record saves time and avoids mistakes. It also helps you see whether the balance the CRA shows matches your own count.
What not to do
Do not ignore CRA mail, and do not let a Requirement to Pay arrive before you have called. Do not agree to a payment you cannot afford just to end the call, since a missed arrangement is worse than a modest one you keep. Do not pay a company that promises to wipe out tax debt, and do not move assets without advice.
If you want to speak to a licensed mortgage professional about borrowing against your home, after you have spoken to the CRA and a trustee, you can check your options. It is a request, and you can say no.
A $19,000 tax balance: arrangement for a year versus a $22,000 second mortgage
Made-up figures. The CRA balance is $19,000. For comparison the CRA interest rate is assumed at 8% a year, simple, ignoring daily compounding and any payments. The second mortgage is $22,000, interest only at an assumed 12%, with an assumed 2% lender fee, 1.5% broker fee and $1,500 for legal, appraisal and title.
- CRA interest for a year if left on an arrangement
- $1,520
- Second mortgage interest for a year
- $2,640
- Second mortgage fees
- $2,270
- Cash left after paying the CRA
- $730
- Second mortgage cost in year one
- $4,910
$19,000 at 8%
$22,000 at 12%
$440 lender, $330 broker, $1,500 legal and other
$22,000 minus $2,270 minus $19,000
Questions people ask
Does CRA debt stop growing if I make a payment arrangement?
No. The CRA says interest accrues at the prescribed rate until the debt is paid in full, compounds daily, and applies to both tax and penalties. An arrangement spreads the payments out but does not freeze the balance, so paying sooner costs less.
What can the CRA do if I do nothing?
Its collections policy says it may garnish wages or other income through a Requirement to Pay, seize and sell assets, or register a certificate in Federal Court, which has the same effect as a court judgment. You must also pay reasonable collection costs.
How much time do I have after a notice of assessment?
The CRA says certain actions, such as starting court proceedings or issuing third party requirements, normally cannot begin until 90 days after the notice of assessment or reassessment is sent. The page lists exceptions, so check the notice you received.
Can the CRA take back a Requirement to Pay once it is issued?
The CRA says it usually will not stop or withdraw one until the account is paid in full or it is shown to cause financial hardship. If your situation changes, call your collections officer, and ask to speak to a supervisor if you disagree with a decision.
Will I need to show the CRA my finances?
Usually yes. The agency says you may have to provide proof of income, expenses, assets and liabilities, and the officer may verify them. Gather pay stubs, bank statements and a monthly budget before you call so the conversation moves faster.
Sources
- Canada Revenue Agency: Tax collections policies (IC98-1)
- Canada Revenue Agency: What you need to know about payment arrangements (archived tax tip, 2018)
- Office of the Superintendent of Bankruptcy Canada: Consumed by debt? Information for consumers on the insolvency process
- Financial Consumer Agency of Canada: Getting help from a credit counsellor