I owe money on my taxes. What can I do?

FPAC responds:

Tax season is over and many do get excited when anticipating a big tax return. But if you owe money, on the other hand, you might feel a little defeated—or downright worried. But don’t fret, you have plenty of options, regardless of your unique financial situation.

What to do if you owe money on your taxes

Scenario 1: If you have money to pay your taxes on hand

If you owe money to the government and you have that amount already set aside, or an emergency fund you can dip into, you simply need to pay the amount and settle up. You’ll make your payment to the Canada Revenue Agency (CRA). These days, there are plenty of convenient payment options available to you—and old school ones, too. Here’s how to pay:

• MyCRA account: You can pay online with your MyCRA account. Just login and click on the Make Payment button. 
• Online banking: You can pay online. Simply make the CRA a payee on your bills list with your financial institution of choice. Your Social Insurance Number (SIN) will be the account number with the CRA. 
• In person: If you’re headed to the bank to pay, be sure to have your Notice of Assessment or SIN number on hand.
• By mail:  If you want to pay by mail, you can do so once you receive your Notice of Assessment (NOA). You can make a payment to the CRA with a cheque from your Canadian bank account. Make the cheque payable to the Receiver General for Canada. Include your remittance voucher that comes with your NOA and mail it to the address on the back of your voucher.

Scenario 2: If you don’t have the money to pay your taxes in full

First things first: don’t panic. This situation is very common. If you can’t pay the full amount that you owe, the CRA can help you set up a payment arrangement. 

Before you call the CRA to set this up, be sure to calculate your monthly income and expenses to determine what you can afford to pay the CRA each month. The CRA offers the Payment Arrangement Calculator. Once you know your numbers, call 1-866-256-1147 to get started. And if your financial circumstances happen to change over the course of your payment plan, you can call again to adjust the payment plan.

What not to do

Don’t avoid setting up a payment plan or adjusting the schedule if you can’t afford it right now. If you have a balance owing and are unable to pay it by the payment due date, the CRA will start charging you compound daily interest (based on the 2021 tax year, interest payments would start on May 1, 2022). The rate of interest the CRA will charge on current or previous balances can change every three months based on prescribed interest rates.

Watch for installments

An important point is that if you have net taxes owing of more than $3,000, or $1,800 for Quebec, you will likely be required to make income tax installments for the current year. It’s like prepaying your tax bill.

For example, if it’s the first time you owe tax in installments, you may be asked to prepay your taxes on Sept 15, 2022 and December 15, 2022. If you’ve already been asked to pay tax installments for previous years, you could be asked to prepay your taxes on March 15, June 15, Sept 15 and Dec 15 this year. 

Be sure to check out the installment section on your My CRA Account for Individuals so you have the right amount and the dates that they are due. 

How to avoid owing money on your taxes 

Paying tax is just one of those certainties in life, but that doesn’t always mean you will have to owe more at the end of the year. Everyone owes taxes on income. The question becomes how much is in our tax account at the end of the year when we file our taxes to reconcile the amount we owe. A refund actually means that we have overpaid the government and our tax account throughout the year, and, just as a reminder, no interest is earned in that account.

Fortunately, we can do some forward planning and there are ways to reduce the balance you owe at the end of the year.

Some of those planning strategies would include the following:

• Increase your the tax taken off your paycheques: Have your employer increase the amount of tax they take off your paycheque with a form TD1 (however, this will mean less in your pocket throughout the year)
• Make contributions to an RRSP or Spousal RRSP: Contributions to your RRSP will reduce your income dollar for dollar. For example, if your total income was $60,000 and you made a RRSP contribution of $5,000, your taxable income for the year would be $55,000. (Be sure to make sure you’re mindful of your contribution room, too).
• Increase the tax withheld from other income sources: For instance, OAS and CPP.
• Make charitable donations: You can receive a 15% tax credit on your first $200 donated and 29% tax credit on amounts donated above $200. Note: You can only claim donation credits from registered charities
• Check for eligible tax deductions: Making sure you are taking advantage of all the tax deductions and credits you may be eligible for disability, childcare, employment expenses, tuition, transfers from other members of your family. For example, pension, children, medical expenses, capital losses etc. It may be beneficial to enlist the services of an accountant or tax specialist to ensure nothing is missed. Make sure they are aware of your situation so they may offer suggestions that benefit you.

The bottom line? Unless you have earned less than $14,398 this year, (Basic Personal Amount for 2022), you will owe taxes. Owing tax isn’t an issue as long as you’ve planned ahead. And even if you haven’t, there are plenty of options available to you, no matter your financial situation.

Scott Rizzuto, CFP, CIM, is an Associate Advisor with IPC Securities Corporation in West Niagara.

Qualified Advice is written by members of FPAC (the Financial Planning Association of Canada), a MoneySense content partner. Working closely with governments, regulators, financial planners, academia, vendors and the general public, FPAC’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect afforded to other advisory professions.

If you have financial planning questions, FPAC members can help—consult our directory of members to find the right fit for you.  

Read more qualified advice:

• Am I required to divide my pension with my ex?
• I cosigned a motorcycle loan and the owner passed away: What are my obligations to the bank?
• What do rising interest rates mean for my mortgage?
• What’s the difference between beneficiaries, successor holders and successor annuitants?