What should I do if I have tax debt?

Receiving a notice from Revenu Québec or the Canada Revenue Agency indicating a balance owing can quickly become a source of anxiety. Interest accrues, penalties are added, and the fear of collection action can set in.

The good news is that a tax debt doesn't mean you're out of options. A payment agreement, consumer proposal or personal bankruptcy are just some of the options available, depending on your situation.

The important thing is to act early and clearly understand your rights and remedies.

Tax debt: what exactly are we talking about?

A tax debt is an amount you owe the State following the filing of your tax return or an adjustment made by the tax authorities.

Unlike a credit card or personal loan, this is a government debt, with more extensive recovery powers.

In Quebec, this debt may come from both provincial and federal tax, and the steps to be taken depend on the organisation concerned.

Revenu Québec vs ARC: who can claim what from you?

In Quebec, two tax authorities can claim a balance from you:

• Revenu Québec: responsible for provincial tax, GST/QST, certain tax credits and various Quebec-related assessments.

• Canada Revenue Agency (CRA): responsible for federal tax and certain federal programs.

It is therefore possible to be indebted to one, the other...or both. Each organisation administers its own payment arrangements and collection measures.

How is a tax debt created?

A tax debt can arise in a number of situations:

• You file your return and a tax liability is calculated;

• You receive a notice of assessment showing a balance due;

• An audit or adjustment results in an additional amount;

• Inadequate source deductions or unplanned additional income increase your tax.

Once the notice has been issued, interest starts to accrue if the balance is not paid by the due date. If you don't act quickly, the amount may increase and lead to collection proceedings.

What happens if you don't pay your tax?

Ignoring a tax debt may seem tempting when your financial situation is already fragile. But the longer you wait, the more serious the consequences can be.

Interest and penalties: debt can grow quickly

As soon as a tax balance is not paid by the due date, daily interest is charged. Penalties may also apply, particularly for late filing or repeated default.

Even a modest initial debt can therefore increase rapidly. This mechanism makes repayment more difficult as the months go by and can turn a simple delay into a real financial problem.

Possible recovery measures

If no agreement is reached, Revenu Québec or the CRA can take various recovery steps, for example :

• Securing wages directly from your employer;

• Freezing or seizing bank accounts;

• Compensating for your tax refunds or certain credits;

• Inscribing a legal mortgage on a property;

These actions can occur without going through the same stages as a traditional creditor, which is why it is so important to react quickly.

Paying by instalments: how do I negotiate an agreement with Revenu Québec?

When you cannot pay your tax debt in a single instalment, it is often possible to reach a payment agreement with Revenu Québec. This approach avoids the escalation of collection measures, provided you act quickly and propose a realistic plan.

The instalment payment agreement

An instalment plan is based on a simple principle: you pay off your tax debt in monthly instalments rather than in a single payment.

The aim is twofold:

• Allowing taxpayers to meet their tax obligations without compromising their essential expenditure;

• Ensuring that the State recovers sums due within a reasonable period of time.

In general, interest continues to apply until the balance is repaid in full. The agreement must therefore be realistic to avoid defaulting again.

What Revenu Québec is looking at

Before accepting an agreement, Revenu Québec will analyse your financial situation. The elements generally assessed include :

• Your actual ability to pay, based on your current income;

• Your detailed budget (housing, transport, food, financial obligations);

• Your payment history and regularity;

• Your level of cooperation and your willingness to regularize the situation.

The more consistent your proposal is with your financial situation, the greater the chances of acceptance.

Best practices to increase your chances

To maximise your chances of obtaining an agreement :

• Prepare full documentation (income, expenses, debts, assets);

• Present a realistic payment plan that you can stick to over time;

• Avoid any further delays once the deal is done;

• Communicate quickly if your situation changes.

A well-negotiated agreement can stabilise the situation. However, if the amount remains too high despite the proposed payments, it may be worth considering other solutions governed by the law.

Can a tax debt be included in a consumer proposal?

Tax debts are generally considered to be unsecured debts. This means that they are not attached to a specific asset (such as a mortgage on a house or a secured car loan).

As such, they can be included in a consumer proposal filed by a licensed insolvency trustee. This procedure allows you to negotiate a partial repayment of the balance, depending on your actual ability to pay.

Can taxes be included in a personal bankruptcy?

Debts owed to Revenu Québec or the Canada Revenue Agency are eligible for personal bankruptcy. They are treated as unsecured debts and can therefore be written off at the end of the process, subject to certain exceptions provided for by law.

Filing for bankruptcy brings interest and collection measures to an immediate halt, thereby putting an end to seizures or active steps.

Which solution should you choose: payment agreement, proposal or bankruptcy?

The choice of solution depends mainly on your real ability to repay, the total amount owed and the pressure exerted by tax creditors. There is no universal answer and each situation deserves a personalised analysis.

If you are still solvent

Do you have a stable income and are you able to repay the entire debt over a reasonable period of time? A payment agreement with Revenu Québec or the CRA may be all you need. You repay 100% of the balance, with interest, but avoid insolvency proceedings.

If you can't pay back 100% of the purchase price

If the debt is too high in relation to your income and even an instalment agreement remains unrealistic, a consumer proposal may be more suitable. This allows you to negotiate a partial repayment, with interest suspended and protection against recourse.

If no solution is viable

When debts have become totally unmanageable and no realistic agreement is possible, personal bankruptcy can be a last resort to start afresh.

The aim is not to choose the quickest solution, but the one that is most consistent with your current financial situation.

Mistakes to avoid

When faced with a tax debt, certain decisions can make the situation worse:

• Paying tax with a credit card, which shifts the debt to an often higher interest rate;

• Ignoring notices or appeals from tax authorities, which can speed up collection action;

• Waiting too long before seeking help, reducing the options available;

• Recourse to private or very high rate loans, which add further financial pressure.

When should you consult a licensed insolvency trustee?

You don’t need to wait until your situation becomes critical to consult a Licensed Insolvency Trustee. The earlier you seek help, the more options and solutions will be available to you.

However, there are a number of warning signs:

• Your payments have become impossible to keep up with;

• Interest is increasing the debt each month;

• Collection measures are already underway (seizure, account freeze, repeated calls);

• You feel constant financial stress, which affects your sleep, concentration or family life.

At Mallette, our financial recovery advisors and licensed insolvency trustees work together to analyze your entire situation. We clearly explain your options and build a plan tailored to your financial capacity. Our approach is humane, confidential and non-judgmental.

The earlier you consult, the more you give yourself the means to transform a stressful situation into a concrete solution.