3 Ways to Reduce Income Tax Interest and Penalties
When you owe taxes to the Canada Revenue Agency (CRA) but can’t pay, you don’t just have to worry about your outstanding balance — you also have to think about your income tax interest and penalties.
If you don’t file your taxes on time, the CRA can charge you late-filing penalties of 5% to 10% of your total balance owing (depending on if you have been late in a previous year, too), and an additional 1%-2% of your balance owing for every additional month you’re late, up to 12 months.
And then there is the interest. The CRA charges interest on your income tax every day that you have an outstanding balance after the filing due date of April 30.
This applies to sole proprietors, too. Even though the self-employed tax deadline is June 15, if you don’t file by April 30, you will be charged interest on any balance owing starting May 1.
These penalties and interest fees can make it even harder to pay what you owe. Luckily, there are ways to ease the burden.
Here are three of the best ways to reduce your income tax interest and penalty fees:
- Pay Your Balance in Full
The best way to stop CRA interest and penalties is to pay the balance in full. Of course, you may not have the funds available. At this point, the CRA expects you to try every avenue to get them the money. If you can seek alternative funding, like a secured personal loan, you can pay your CRA balance with that money, and then repay the loan over a fixed schedule.
- Negotiate with the CRA
The CRA may grant relief from penalties or interest depending on:
- Extraordinary circumstances;
- Errors or delays caused by the CRA;
- Inability to pay or financial hardship;
- Or other circumstances.
However, should you choose to go this route, don’t go it alone. It’s difficult to try to negotiate with the CRA on your own, as they may use your information to start collection action.
Also, negotiating with the CRA may only reduce your penalties or interest — not the overall tax debt. The balance owing will still need to be paid.
For more about trying to negotiate with the CRA, download our free eBook, How to Make a Settlement with the CRA.
- Filing for a Consumer Proposal or for Bankruptcy
When you file for a Consumer Proposal or Bankruptcy, it stops all collection action and can erase debts owed — including tax penalties and interest.
In a Consumer Proposal, the majority of your creditors — including the CRA — must accept a settlement offered to pay off your debts.
In a Bankruptcy, your assets are sold to pay off debts.
In either case, your debts, including any tax debt, will be erased.
To see if you are eligible for a Consumer Proposal or for Bankruptcy, consult with a Licensed Insolvency Trustee, such as our team at Fuller Financial Solutions.
Filing your taxes on time is also key to avoiding CRA penalties and interest. Even if you know you won’t be able to pay, it is better to file your return before the April 30 tax deadline.
At Fuller Financial Solutions, we can help you resolve any tax issues to make sure you stay interest and penalty free.
Contact us for a free consultation. Call 416-927-7200 or visit www.fullersolutions.ca.