According to a 2022 survey released by BDO Canada, more than half of Canadians say they are living paycheck to paycheck. This trend is likely to continue with rising inflation and food costs. What if CRA unexpectedly assesses you for a balance owing on your taxes? How would you manage this unexpected debt?
Understanding why you end up owing taxes and taking steps to prevent an unexpected tax bill is essential in avoiding the burden of additional debt at tax time for managing your finances and ensuring that your debt repayment plan doesn’t go into a tailspin.
There are various reasons why you may be owing taxes when you file. Here are three of the most common reasons:
1. Self-Employment Tax Owings
Self-employment is wonderful, but it does mean you have to take the extra step to save and remit your income taxes owing to CRA on your own. When you misestimate your tax bill and have not remitted enough funds or when you spend your tax savings – hoping you will be able to catch up – you can find yourself with an income tax bill owing to CRA. A general rule of thumb for self-employed individuals is that you should set aside between 25% to 30% of your gross revenue for taxes, including CPP, federal and provincial income taxes, and GST/HST. However, this can vary from business to business, and some companies might be better suited to remit between 25% to 30% of revenue after expenses.
Remedy: It’s important to ensure that you set aside a portion of your income weekly, biweekly, or monthly so you don’t find yourself unable to pay when you are assessed a balance owed when you file. If you have found that you are tempted to spend these savings, then make the installments each month as you go. Know your strengths and your weaknesses and plan your finances around them!
2. Owing Taxes Due to Multiple Jobs
Payroll taxes are not an exact science; what you need to pay towards income tax is based on your total income from all income sources. Everyone gets a “basic personal amount” that doesn’t get taxed – you pay $0.00 in taxes – and after that, different tiers of income get charged a greater and greater percentage of your income. When each employer sets up your payroll, they will estimate your annual income – based on your earnings from them – and take off taxes of each cheque based on that estimation. However, if you have more than one job and all your employers are giving you the “basic personal amount” and remitting based on the lower income tax percentages, then when your income is combined with all employers and assessed by CRA, there will inevitably be more taxes owing that were deducted from your paycheque.
Remedy: Tell your employer about your second job or request additional taxes be withdrawn from your income, and they will help you fill out revised TD1 forms.
3. Insufficient Deductions at Source by Employer
If your income fluctuates – for example, if you work on commission or based on an hourly wage – it may be difficult to estimate your annual income to ensure that the proper amount of deductions are being taken from your paycheque.
Remedy: If you see a trend come April that you always have a bill from CRA requesting an increase in your income tax deductions by your employer, they will ask you to fill out revised TD1 forms.
4. Pension Taxes Not Deducted at Source
Usually, the provider only deducts the taxable income from pensions if you make the specific request for them to do that. Even government pensions such as CPP are not deducted at source.
Remedy: You can speak to an accountant or a tax professional to help you calculate how much you should set aside for monthly taxes, or you can request your pension withhold the taxes so you do not have to worry about saving up for your tax bill each April.
What do I do if I owe taxes to CRA?
If you find yourself owing taxes to the CRA when you file and are caught unprepared to pay an additional bill, you should set aside some time to create a budget and devise a plan to pay off this debt. You can make monthly payments at your bank or by cheque to have the debt with CRA paid off. A CRA collections representative may have reached out to collect the debt, and if that is the case, work with your collection rep to create a payment plan. Be aware of CRA’s correspondence; they will begin enforcement actions much quicker if they are being ghosted.
Can I Negotiate a Tax Owing Settlement with CRA?
CRA will not settle the principal debt informally outside a bankruptcy or a proposal. They may reduce interest and penalties, but if you find yourself owing a substantial amount you cannot pay within a reasonable time, only an insolvency filing, such as a proposal or a bankruptcy, can be used to resolve your debt to CRA.
Managing Tax Owing: The Importance of Regular Savings
We know that a sudden “reduction” in income can be challenging, especially if you’re accustomed to a certain lifestyle. Yet, this is where budgeting, goal setting and monitoring become important. See this article for more information about budgeting and planning to pay off debt.
Crafting a Strategy for Managing Tax Owing to CRA
If you have a significant tax debt owing to CRA or have concerns about your tax debt, we can assist you by helping you crunch the numbers to see how you can pay down CRA or look at other options to resolve the CRA debt. Get educated and empowered to make the right decision for you.
Contact us at 587-802-4461 to schedule a free initial consultation in Alberta, or get in touch with us to book a free consultation. For additional details, you can also explore our website, we will be happy to assist you.