What if I can’t pay my taxes?

This is a very common problem that I hear way too often.  I would like to preach about the virtues of not overspending, sticking to a realistic budget, and things like that.  However, I want you to read my blogs and learn from them, so I will save this for another time.

What I want to talk about is the misconception you are better off to not file your taxes if you can’t afford to pay.  The truth is that this is a great way to get in really, really, big trouble.  For starters filing late will trigger penalties that can be extremely damaging to your finances (or lack thereof).    The penalties for filing late are as follows:  1^st time 5% + 1% per month that you are late to a maximum of 12 months.  That is equal to 17% for those of you who are mathematically challenged.  The 2^nd time you file late the penalties go to 10% + 2% per month to a maximum of 20 months which totals 50% (yikes.  Yes this is correct 50% penalty for filing your taxes late).

As you can see, by filing late you are taking a bad situation and making it way worse.  Tax debts are not fun to pay, but avoiding filing just makes problems become insurmountable.  There is also an out of sight out of mind mentality, which is why often people get 3, 4, or 5 years behind.  Once you are this far behind in your taxes, and you add on the penalties you are in a position that is virtually impossible to get out from.  In addition, the CRA is also charging interest at approximately 6% per year, so now things are getting to the point where you have to contemplate bankruptcy.

I get it.  Paying taxes is not fun.  We all would rather not pay them.  Well that is not the way it works.  You have a duty and responsibility to file and pay your taxes.  The choice you have is whether you suck it up and deal with it, or whether you let it get out of control and ruin your life and potentially your family’s life.  I know this is a bit preachy, but file on time, avoid the penalties and keep the debt at a manageable level.  In addition, if you need help ask.  There are debt counsellors, debt restructuring consultants, and a myriad of others that can help you.  Just don’t wait until the tax bill is the size of Mount Everest before you ask for help.

One final thought.  It is usually the self-employed that have the biggest problems.  This is because taxes are not being withheld, and they end up not putting money aside for their taxes.  If you are an employee the likelihood of having a large tax bill is not very good.  Therefore if you are self-employed put money aside in savings for your taxes.  If you are an employee don’t procrastinate.  You are probably getting a refund anyway.