What to Do If You Can’t Pay Your Taxes on Time
Discovering you owe more taxes than you can pay by the April 30 deadline is stressful. Many Ontario taxpayers find themselves in this situation, whether due to unexpected tax bills, business losses, job changes, or simple cash flow problems. The good news is that you have options, and the worst thing you can do is ignore the problem.
At BBS Accounting in Toronto, we help clients navigate tax debt situations regularly. While owing money to the CRA is never pleasant, understanding your options and taking proactive steps can minimize the financial damage and stress.
File Your Return Anyway
This is the single most important action you can take. Even if you can’t pay what you owe, file your tax return by the April 30 deadline (or June 15 if you’re self-employed).
Why this matters: The CRA charges two separate penalties—one for late filing and one for late payment. The late-filing penalty is 5% of your balance owing plus 1% per month for up to 12 months. If you’ve been charged late-filing penalties in the previous three years, this doubles to 10% plus 2% per month.
The late-payment penalty is much lower. By filing on time even though you can’t pay, you avoid the larger late-filing penalty.
Example: You owe $10,000 and can’t pay by April 30. If you file on time, you’ll only face interest charges on the unpaid balance (approximately 10% annually). If you don’t file until December, you’ll face a late-filing penalty of at least $1,300 ($10,000 × 5% + $10,000 × 1% × 8 months) plus interest on both the original $10,000 and the penalty.
At BBS Accounting, we’ve seen clients avoid thousands in penalties simply by filing on time even when they couldn’t pay. Never let inability to pay prevent you from filing.
Understand Interest Charges
The CRA charges compound daily interest on unpaid tax balances. The prescribed interest rate changes quarterly and is typically 8-10% annually.
Interest begins accruing on May 1 (the day after the April 30 deadline) and continues until the balance is paid in full. Interest compounds daily, meaning you pay interest on the interest.
Example: A $10,000 balance at 10% annual interest costs approximately $833 if paid after one year, or about $70 per month. The longer you wait, the more you’ll ultimately pay.
This interest is not deductible on future tax returns, unlike interest on business loans or investment loans. It’s simply an additional cost.
Payment Options Available
The CRA offers several options for taxpayers who can’t pay their full balance immediately:
Pay What You Can: Even if you can’t pay the full amount, pay as much as possible by April 30. This reduces the balance subject to interest. If you can pay $5,000 of a $10,000 debt, you’ll only pay interest on the remaining $5,000.
Payment Arrangements: The CRA will work with taxpayers who can’t pay in full but can make regular payments. Contact the CRA’s Collections division to propose a payment plan.
Payment arrangements typically involve monthly payments until the balance is paid. The CRA usually accommodates reasonable proposals, though interest continues accruing on the unpaid balance.
Example: You owe $15,000 and can afford $500 monthly. Contact the CRA and propose this payment plan. They’ll typically accept this, allowing you to pay $500 monthly for 30 months (plus interest) rather than facing immediate collection action.
The CRA is more willing to work with taxpayers who are proactive. Calling them before they contact you demonstrates good faith.
Taxpayer Relief Provisions: In cases of extraordinary circumstances like serious illness, natural disasters, or other situations beyond your control that prevented you from paying, you can request relief from penalties and interest under the CRA’s Taxpayer Relief program.
These requests require detailed documentation and are not guaranteed, but the CRA grants relief in genuine hardship situations.
At BBS Accounting, we help clients prepare taxpayer relief applications, significantly increasing the likelihood of approval.
Post-Dated Cheques: Some CRA offices will accept post-dated cheques as a form of payment arrangement. You provide cheques dated for future months, and the CRA cashes them on those dates.
This ensures you stick to your payment plan while avoiding the need for monthly manual payments.
What Not to Do
Several common mistakes make tax debt situations worse:
Don’t ignore CRA notices: Ignoring letters and calls doesn’t make the debt disappear. The CRA has extensive collection powers and will eventually garnish wages, freeze bank accounts, or place liens on property.
Don’t miss future filing deadlines: Even while paying off old debt, continue filing current returns on time. Missing future deadlines compounds your problems.
Don’t borrow from predatory lenders: Some taxpayers take out high-interest loans to pay CRA debts, trading one problem for another. While borrowing to pay CRA can make sense if the interest rate is lower than CRA’s rate, avoid predatory lenders charging 20-30% or more.
Don’t assume you can’t negotiate: Many taxpayers assume the CRA is inflexible. While they do enforce collections, they’re willing to work with taxpayers making good-faith efforts to pay.
CRA Collection Actions
If you don’t file, don’t pay, and don’t communicate with the CRA, they will take collection action:
Demand letters: Initial notices demanding payment. These should not be ignored.
Telephone calls: CRA collections officers will call requesting payment or payment arrangements.
Requirement to Pay (RTP): The CRA can issue an RTP to your employer, requiring them to send your wages directly to CRA until your debt is paid. They can also issue RTPs to your bank, freezing your account and seizing funds.
Liens on property: The CRA can place liens on real estate, preventing you from selling or refinancing until the tax debt is paid.
Asset seizure: In extreme cases, the CRA can seize and sell assets to satisfy tax debt.
Legal action: The CRA can take you to Federal Court to obtain a judgment for the debt, which they can then enforce through provincial collection mechanisms.
These collection actions are serious, but they’re typically last resorts after multiple contact attempts. By being proactive, you can avoid these measures.
Special Considerations for Ontario Business Owners
Self-employed individuals and business owners face additional considerations when dealing with tax debt:
GST/HST Liabilities: If your business owes GST/HST in addition to income tax, the CRA treats these separately. GST/HST debt can result in director’s liability for incorporated businesses, making directors personally liable.
Payroll Source Deductions: If your business failed to remit employee source deductions (CPP, EI, income tax), the CRA treats this very seriously. Directors of corporations are personally liable for unremitted source deductions.
The CRA prioritizes collection of trust funds (GST/HST and source deductions) over income tax because these are funds held in trust for the government. Owing these amounts without paying triggers faster collection action.
Business Restructuring: If your business is struggling financially, consider whether formal insolvency proceedings like a proposal or bankruptcy might be appropriate. This is a last resort, but sometimes necessary.
At BBS Accounting, we work with trustees and insolvency professionals when clients face insurmountable business debt situations.
Using Credit to Pay CRA Debt
Some taxpayers consider borrowing to pay CRA debt. This can be smart if done correctly:
Line of Credit: If you have access to a line of credit at prime rate or similar (currently 6-7%), borrowing from this to pay CRA debt at 10% interest makes financial sense. You save 3-4% annually in interest costs.
Home Equity Loan: If you own a home with equity, a home equity line of credit (HELOC) offers lower interest rates than CRA charges. Borrowing against your home to pay CRA reduces your interest burden.
Payment Plans with Credit Cards: While not ideal given credit card interest rates of 18-20%, using a credit card to pay CRA at least stops CRA collection actions and might buy time to refinance into lower-rate borrowing.
Some credit cards offer 0% promotional rates on balance transfers. Transferring CRA debt to a 0% promotional rate card can be smart if you can pay it off before the promotional period ends.
Avoid: Payday loans, predatory lenders, or other high-interest options that worsen your financial situation.
Preventing Future Tax Debt
Once you’ve addressed current tax debt, implement strategies to prevent recurrence:
Increase withholding: If you’re employed, file a new TD1 form requesting additional tax withholding from your paycheque. This prevents year-end surprises.
Make tax installments: If you’re self-employed, make quarterly tax installments as required. Set aside funds monthly to cover these.
Work with BBS Accounting: Year-round tax planning helps identify tax obligations before they become debts. We help clients estimate taxes owing and set aside appropriate funds.
Separate tax account: Create a separate savings account for tax funds. Deposit your estimated tax amount monthly and don’t touch this money except to pay taxes.
Reduce tax liability: Maximize RRSP contributions, claim all legitimate deductions, and implement tax-planning strategies that reduce your overall liability.
Communication Is Key
The most important thing when facing tax debt is communicating with the CRA. They’re much more willing to work with taxpayers who are upfront about their situation than those who avoid contact.
When contacting the CRA about payment problems:
- Be honest about your financial situation
- Propose a realistic payment plan you can actually maintain
- Follow through on any commitments you make
- Continue filing returns on time even while paying off debt
- Keep records of all communications with CRA
If you’re uncomfortable dealing with the CRA directly, BBS Accounting can communicate on your behalf as your authorized representative.
Taxpayer Relief Program
The Taxpayer Relief program allows the CRA to cancel or waive penalties and interest in certain circumstances:
Extraordinary circumstances: Natural disasters, serious illness, accidents, emotional or mental distress, civil disturbances, disruptions in services, and errors by the CRA.
Actions of the CRA: If CRA delays, errors, or provided incorrect information caused your inability to pay, relief may be granted.
Inability to pay or financial hardship: While less commonly successful, genuine financial hardship can sometimes support relief requests.
Applications must include detailed explanations and supporting documentation. At BBS Accounting, we prepare taxpayer relief applications for clients, presenting their situations in the strongest possible light.
The CRA can only grant relief for the previous 10 taxation years, so file relief requests promptly.
Hardship Provisions
If paying your tax debt would cause genuine hardship—inability to pay for basic necessities like food, shelter, or medical care—the CRA may temporarily suspend collection action.
You’ll need to provide detailed financial information showing income, expenses, assets, and liabilities. The CRA reviews these situations case-by-case.
Hardship provisions don’t eliminate the debt or stop interest from accruing, but they do prevent aggressive collection action while you’re genuinely unable to pay.
Provincial Tax Debt
Remember that you owe both federal and Ontario provincial taxes. Most of your tax debt is federal, but a portion is provincial.
The CRA administers and collects Ontario personal income tax, so you deal with CRA for both portions. However, the interest rates and policies may differ slightly.
Long-Term Solutions
For taxpayers facing chronic tax debt situations:
Review your business structure: If you’re consistently owing large amounts, consider whether incorporation might provide better tax planning opportunities.
Hire professional help: At BBS Accounting, we work with clients to restructure their financial affairs to prevent ongoing tax problems.
Address underlying issues: If tax debt stems from overspending, business problems, or other issues, addressing these root causes is essential for long-term financial health.
Don’t Let Pride Stop You From Seeking Help
Many Ontario taxpayers feel embarrassed about tax debt and avoid seeking professional help. This is a mistake. Tax professionals like BBS Accounting have seen every situation imaginable. We’re not here to judge—we’re here to help you resolve the problem and move forward.
The cost of professional help is minimal compared to the interest, penalties, and stress you’ll avoid. We can negotiate with the CRA on your behalf, prepare taxpayer relief applications, develop realistic payment plans, and implement strategies to prevent future problems.
The Bottom Line
Owing taxes you can’t pay is stressful, but it’s not hopeless. By filing on time, communicating with the CRA, proposing reasonable payment arrangements, and seeking professional help when needed, you can resolve tax debt while minimizing financial damage.
The CRA wants to collect what’s owed, but they’re surprisingly reasonable with taxpayers making good-faith efforts. What they won’t tolerate is being ignored or deceived.
If you’re facing tax debt in 2026, contact BBS Accounting immediately. We’ll review your situation, explain your options, and develop a strategy to resolve your debt as quickly and affordably as possible. Don’t let tax problems spiral out of control—take action now.
Remember: filing on time even when you can’t pay is the single most important step. Everything else follows from there.