If you owe CRA money you do not have, the single most useful thing to know is that filing and paying are two separate obligations with two separate penalties. Not paying costs you interest, currently 7% compounded daily. Not filing costs you 5% of the balance immediately plus another 1% every month, on top of that interest. So filing a return you cannot pay is always cheaper than not filing at all, and it is not close.
After that, you have four realistic options, roughly in order of preference: pay it with cheaper borrowed money, set up a payment arrangement with CRA, apply for taxpayer relief to have penalties and interest waived, or in genuine hardship, have collections suspended. Most people can use more than one of these at the same time.
Here is what each one actually involves, what CRA can do if you ignore the problem, and where the personal liability lands if you run a corporation.
Our tax services are available in Coquitlam and other regions across British Columbia.
On this page
- First: File Anyway. Here Is Why That Matters More Than Paying
- What CRA Does When a Balance Goes Unpaid
- Option 1: Pay in Full With Borrowed Money
- Option 2: Set Up a CRA Payment Arrangement
- Option 3: Taxpayer Relief, Getting Interest and Penalties Waived
- Option 4: Financial Hardship and Uncollectible Status
- Corporations: Director Liability for Source Deductions and GST
- 5 Moves That Make Your Situation Worse
- How to Prevent This Next Year
- Frequently Asked Questions
- Talk to Someone Before CRA Escalates
First: File Anyway. Here Is Why That Matters More Than Paying
| If you file on time but cannot pay | If you do not file | |
| Late filing penalty | None | 5% of the balance, plus 1% per month up to 12 months |
| Repeat offence penalty | None | 10% plus 2% per month up to 20 months |
| Interest | 7%, compounded daily on the balance | 7%, compounded daily on the balance and on the penalties |
| Benefits and credits | Continue | GST credit, Canada Child Benefit and provincial benefits stop |
| Payment arrangement available | Yes | CRA generally wants returns filed first |
| Taxpayer relief available | Yes | Much weaker case |
On a $20,000 balance filed a year late, the late filing penalty alone is roughly $3,200 before you count a dollar of interest. That is $3,200 you can avoid by doing something free.
There is also a benefits angle people forget. Unfiled returns stop the Canada Child Benefit and the GST credit, which for a family under financial pressure is often a larger monthly hit than the tax debt itself.
What CRA Does When a Balance Goes Unpaid
Day 1 to 90: Notices and Interest
Interest starts accruing the day after the payment deadline and compounds daily. You get your notice of assessment and then reminder notices. For individual income tax, CRA generally cannot start legal collection action until 90 days after the date on your notice of assessment. That grace period does not apply to GST/HST or payroll source deductions, where they can move immediately.
Month 3 to 6: Collections Contact
You will hear from a collections officer, by letter and then by phone. This is the stage where a proactive call from you materially changes the outcome. An officer dealing with someone who called first and proposed a plan behaves very differently from one chasing someone who has not responded to three letters.
After That: Legal Action, and What It Looks Like
CRA has collection powers that most creditors do not, because they do not need to go to court first.
- Requirement to pay. Sent to your bank, your employer or your customers, redirecting money owed to you directly to CRA. Wage garnishment without a court order.
- Set off. Your GST credit, Canada Child Benefit, income tax refunds and other federal payments applied against the debt.
- Lien on real property. Registered against your home or other property, which surfaces when you refinance or sell.
- Seizure and sale of assets.
- Third party assessments where assets were transferred to a spouse or relative for less than fair value.
None of this happens without warning. It happens after warnings are ignored.
Option 1: Pay in Full With Borrowed Money
Before you assume a payment arrangement is the answer, do the arithmetic. CRA charges 7% compounded daily on overdue tax, and unlike business interest, interest on personal income tax debt is not deductible.
| Source | Typical cost | Worth considering when |
| Secured line of credit | Often well below CRA’s rate | You have home equity and stable income |
| Unsecured line of credit | Comparable to or below CRA’s rate | Good credit, moderate balance |
| Business loan, for a corporate balance | Varies, and interest may be deductible | The debt relates to the business |
| Credit card | Far higher than CRA | Almost never |
| RRSP withdrawal | Withholding plus full income inclusion plus permanent loss of room | Almost never |
If you can borrow at a lower effective cost than CRA charges, borrowing and paying in full is usually the cleanest answer. It also ends the collections relationship entirely, which has value of its own.
Option 2: Set Up a CRA Payment Arrangement
A payment arrangement is an agreement to pay the debt over time in scheduled instalments. Interest keeps running, but collections action stops while you are in compliance.
How to Request One
- Online through CRA My Account or My Business Account, which is the fastest route for smaller balances
- Through the automated TeleArrangement service
- By calling the CRA debt management call centre and speaking to an officer
CRA also publishes a payment arrangement calculator that shows what a proposed schedule costs over time. Run your numbers through it before you call so you are proposing something specific rather than asking what they will accept.
What CRA Will Ask You For
For anything beyond a small, short balance, expect to provide:
- Your income and your household expenses, line by line
- Assets you own, including property, vehicles and investments
- Your ability to borrow, and whether you have tried
- Bank statements supporting the above
They are assessing whether you genuinely cannot pay in full, or simply would prefer not to. Those get very different treatment.
What Makes a Proposal Get Accepted
- You called them. Proactive contact before collections escalates is worth more than any argument you will make later.
- The timeframe is realistic and short. Twelve months is normal. Twenty four is negotiable. Five years is not a payment plan, it is a request they will not grant.
- The numbers are honest. An expense list with no room in it at all reads as unserious. Show real capacity.
- Your filings are up to date. CRA rarely arranges payment on a file with returns still outstanding.
- Current year obligations continue. Nothing kills an arrangement faster than falling behind on this year’s instalments while paying off last year’s.
Option 3: Taxpayer Relief, Getting Interest and Penalties Waived
Taxpayer relief is a discretionary application asking CRA to cancel or waive penalties and interest. It does not touch the underlying tax, and there is a hard ten calendar year limit from the end of the tax year concerned.
The Four Grounds CRA Actually Accepts
| Ground | What it looks like in practice |
| Extraordinary circumstances | Serious illness or accident, death in the immediate family, natural disaster, fire, flood, civil disturbance |
| Actions of CRA | Processing delays, incorrect information given to you in writing, errors in published material, unreasonable delay in resolving an objection |
| Inability to pay or financial hardship | Paying the interest would prevent you meeting basic living expenses, or would jeopardise a viable business’s ability to continue |
| Other circumstances | A genuine catch all, applied narrowly |
Form RC4288 and What to Attach
Use form RC4288, Request for Taxpayer Relief. The form is short. The attachments are what decides it.
- A clear chronology linking the circumstance to the specific period you failed to file or pay
- Medical documentation, death certificates, insurance claims, disaster declarations, whichever applies
- Financial statements showing hardship, if that is your ground
- Evidence you corrected the situation as soon as you were able
Vague applications get refused. An application that says “I was unwell in 2023 so please waive my interest” fails. One that says “I was hospitalised from March to July 2023, here are the records, my bookkeeping was not maintained during that period, I filed as soon as I was discharged, and I am asking for relief on penalties and interest for that specific year” has a real chance.
What Relief Does Not Cover
The tax itself is never waived under this program. Neither is interest and penalties older than ten years. And a refusal can be reviewed at a second level within CRA, and then by the Federal Court on judicial review, but the court reviews whether the decision was reasonable, not whether they would have decided differently.
Option 4: Financial Hardship and Uncollectible Status
Where someone genuinely has no capacity to pay and no realistic prospect of gaining it, CRA can suspend collection action and classify the account as currently uncollectible. The debt does not disappear and interest continues to accrue, but active collection stops and the file is reviewed periodically.
Where the debt is not recoverable in any realistic timeframe, a consumer proposal or bankruptcy through a licensed insolvency trustee can discharge tax debt like other unsecured debt. There are exceptions for very large personal income tax debts that make up most of what you owe, and for unremitted source deductions and GST held in trust. This is a licensed insolvency trustee conversation, not a do it yourself one.
Corporations: Director Liability for Source Deductions and GST
This is the part that surprises incorporated owners the most, so read it carefully.
Limited liability does not protect directors from two categories of corporate tax debt:
- Payroll source deductions, the income tax, CPP and EI withheld from employees
- Net GST/HST the corporation collected and did not remit
Those amounts are considered held in trust for the Crown. If the company does not remit them, CRA can assess the directors personally for the full amount plus interest and penalties. Corporate income tax is generally not included, but the two categories above cover most of what a struggling business falls behind on.
Two things matter if you are exposed:
- The two year rule. CRA generally cannot assess a director more than two years after they ceased to be a director. Resigning properly and documenting it starts that clock. Resigning informally, or continuing to act as a director after resigning, does not.
- The due diligence defence. A director who took reasonable steps to prevent the failure may not be liable. What counts is evidence of active oversight and steps taken, not good intentions.
The practical rule for any business under cash flow pressure: pay source deductions and GST before you pay anything else, including yourself. Those are the debts that follow you home.
5 Moves That Make Your Situation Worse
| Move | Why it backfires |
| Not filing because you cannot pay | Adds a 5% penalty plus 1% per month, and stops your benefits |
| Ignoring collections letters | Removes every option that depended on being proactive |
| Agreeing to a payment plan you cannot sustain | Defaulting on an arrangement makes the next one much harder to get |
| Using payroll source deductions or collected GST as working capital | These are trust funds, and directors are personally on the hook |
| Moving assets to a spouse to protect them | CRA can assess the transferee for the value received, and it destroys your credibility on everything else |
How to Prevent This Next Year
Most CRA balances are not caused by a bad year. They are caused by a good year with no instalments.
- If your net tax owing exceeds $3,000 in the current year and in either of the two prior years, you are required to pay quarterly instalments on March 15, June 15, September 15 and December 15
- Corporations generally pay monthly instalments, with some small CCPCs eligible for quarterly
- Set aside a fixed percentage of every payment you receive into a separate account and treat it as money that was never yours
- If your income jumped this year, calculate what you will owe now rather than discovering it next April
If you are already in the situation rather than trying to prevent it, the first move is still the same: get the returns filed, get an accurate number, and approach CRA with a specific proposal rather than waiting. Our team at MaxPro Financials does this work for BC business owners and individuals regularly. Bringing years of unfiled returns current, calculating what is actually owed before you commit to a payment schedule, preparing taxpayer relief applications with the documentation that gets them approved, and dealing with collections officers so you do not have to. If you are behind, the situation almost always looks worse from the inside than it does once someone has put real numbers to it.
Frequently Asked Questions
Will CRA accept less than I owe?
Not on the tax itself. Unlike some other jurisdictions, CRA has no settlement or offer in compromise program for the principal amount. They can waive penalties and interest through taxpayer relief, and the underlying tax can be reduced through insolvency proceedings, but there is no negotiating the tax down directly.
Does a payment arrangement stop interest?
No. Interest at 7%, compounded daily, continues to accrue on the balance for the entire life of the arrangement. What it stops is collection action. This is exactly why borrowing at a lower rate and paying in full often beats a long arrangement.
Can CRA garnish my wages without a court order?
Yes. A requirement to pay can be issued to your employer, your bank or your customers without any court involvement. This is a significant power that ordinary creditors do not have, and it is why ignoring collections letters is so much riskier with CRA than with other debts.
Will CRA take my house?
Rarely, and not without a long series of prior steps. What is far more common is a lien registered against the property, which sits there and has to be dealt with when you refinance or sell. Seizure and sale of a principal residence is a last resort in practice.
What if I owe from several years?
File everything that is outstanding first, in order, so you have one accurate total. Then deal with the whole balance as a single arrangement. Piecemeal negotiation on individual years does not work and taxpayer relief applications are stronger when they cover the full period with a coherent explanation.
How long can I take to pay?
There is no published maximum, but expect CRA to push for full payment within about a year, and to require detailed financial disclosure for anything longer. Two years is achievable with a strong case. Anything beyond that usually requires a hardship analysis.
Is CRA interest tax deductible?
Interest and penalties on personal income tax are not deductible. Interest on some business related tax debts has different treatment, so ask specifically about your situation rather than assuming.
Can I still get my GST credit and Canada Child Benefit if I owe money?
You keep receiving them if your returns are filed, but CRA can apply them against your tax debt through set off. If your returns are not filed, the payments stop altogether, which is usually worse.
I am a director of a company that owes payroll remittances. How exposed am I?
Personally liable for the unremitted source deductions and net GST, plus interest and penalties, unless you can establish a due diligence defence. CRA generally has two years from the date you ceased to be a director to assess you. Get advice before you resign, not after.
What is the difference between a payment arrangement and taxpayer relief?
A payment arrangement changes when you pay. Taxpayer relief changes how much you pay, by removing penalties and interest. They are separate applications and you can pursue both at the same time.
Talk to Someone Before CRA Escalates
The gap between a manageable tax debt and a serious one is usually just time and silence. Interest compounds daily, penalties stack, and every collection tool CRA has becomes available once the warnings have been ignored long enough.
MaxPro Financials helps BC individuals and business owners get back on the right side of CRA: unfiled returns brought current, accurate balances calculated, payment arrangements negotiated, taxpayer relief applications prepared properly, and director liability exposure assessed before it becomes an assessment. Book a consultation and we will look at the real numbers with you and lay out which of the options above actually applies to your situation.