Every year, many Canadians find that they owe the Canada Revenue Agency (CRA) more than expected after filing income tax returns. Just like many other debts, if you cannot pay what you owe on time, you will end up paying interest charges as well as penalties for late payment.
Not everyone has cash lying around to send to the CRA, and there may be some other bills you need to pay off first. So if you cannot pay what you owe right away, the best step is to contact the CRA and tell the representative your plan to pay off that debt.
However, in some cases, tax debts pile up to the point where people cannot fit them into their monthly budget. The CRA is not a creditor who will simply wait a while and then charge the debts off, either. They will garnish your wages and apply liens to your property, so you don’t want to put this off.
Does this describe your situation?
If so, you may want to consider using your home equity to pay off your tax debt. We have worked with clients who owed anywhere from about $10,000 to over $200,000 to the CRA – as well as sizable credit card balances and other forms of unsecured debt.
For some of these clients, the tax debt was a surprise that came after an unwise decision, such as selling an investment property and not purchasing another one within the time frame before they have to report the profit. In other cases, the clients were either self-employed or owned their own small businesses, and they were in over their heads.
If you own your own home and have accumulated some equity along the way, then you have a financial resource at your disposal to settle the debt before interest and penalties accrue. If things go far enough, the CRA could slap a lien on that same house, so you might as well control the process of adding to the amount owed and settle the debt now.
One problem that can arise, though, is that before you can take out a home equity loan, your lender may want you to settle your CRA debt. That’s the height of irony – because the only reason you need the loan in the first place is to take care of that debt. Here are some ways to get around this problem.
Do you have a home equity line of credit (HELOC)?
Do you have enough room on that credit line to pay off the debt? That’s a great way to take care of the problem, especially since the interest rate is probably something along the lines of prime + ½ percent. Afterward, you’ll want to work in your budget to pay that HELOC balance down. Or you could refinance the property and roll that balance into the new loan.
Another solution involves borrowing money from a relative or friend and then using those funds to pay the CRA debt. Afterward, you can refinance your mortgage, pay back the loan, and work on building home equity again.
In some cases, second mortgage private lenders will lend you the money even with the outstanding CRA debt. Then you can pay off the debt and then refinance later. There are some “alt-A” and “B” lenders (alternative mortgage lenders) who will work with you in a situation like this.
You could also refinance your first mortgage with a “B” lender and take out enough mortgage to pay your CRA debt too, so long as they will work with that arrangement.
But what if you don’t have enough equity to settle your CRA debt in total? At that point it is time to consider a negotiated settlement. In most cases, this involves bringing in a trustee to file a consumer proposal on your behalf. In other cases, hiring a savvy tax accountant can make the difference.
Every situation is different, which is why there are so many possible solutions. There are some instances, though, when homeowners will have a hard time getting traditional lending at any point down the line, no matter what remedy you find for the CRA debt. Situations like this generally involve self-employed persons who have a hard time providing income verification, people whose income no longer meets the new stress test guidelines, and people whose personal credit reports feature several mortgage payments and/or instances of insolvency.
Here’s the bottom line: if you find yourself behind the eight-ball with respect to the CRA, and you don’t think you can fit a monthly payment plan into your budget, get in touch with us at Amansad Financial. We will review your situation and come up with a recommendation tailored to your needs.