It's bad enough to discover that your business is facing a hefty tax bill. But what if you can't pay?
"It comes up a lot," says Robert Kepes, partner at the Toronto law firm Morris Kepes Winters LLP.
A company might be in trouble because its revenues have declined, or it has been reassessed by Canada Revenue Agency and must cough up more than it planned.
"They're faced with either having to pay tax ... or continuing to pay their rent and their salaries," Mr. Kepes says.
It happens to small businesses and professionals far more than to individual workers, because employees' income taxes are deducted automatically by their employers. Businesses, on the other hand, must calculate their taxes based on what they expect to earn. They are supposed to pay regularly, typically every quarter.
But as anyone who has run a business knows, cash flow can be uneven, and owners might not have enough on hand to pay at tax time.
Understandably, few businesses want to talk about these unpleasant experiences. One southern Ontario professional in a financial pickle who did not wish to be identified said, "I don't want to talk about it. I'm already a year behind."
The worst thing you can do is pretend it isn't happening, because CRA will find you, experts say.
"Throwing anything you get from the CRA in the drawer and forgetting about it is a really bad idea," says Robin Taub, a chartered professional accountant in Toronto and adviser for TurboTax, the software that many Canadians use at tax time.
"If you do throw that envelope away, the CRA can garnishee your wages, taking them right out of your bank account. You really need to get in touch with them," Ms. Taub says. "They can work out a payment plan."
Indeed, CRA has a section on its website that addresses the dreaded question: "What if I cannot pay in full right now?"
"Take action right away. Ignoring your debt does not make it go away. In fact, waiting may make any financial or legal consequences more serious," the CRA website says.
On the other hand, you also can't just pay on your own schedule and walk away. "They can work out payment plans with you, but they're still going to charge you interest and penalties," Ms. Taub says.
In some cases, the penalties and sometimes the interest might be reduced or waived. "If it's just, 'Oh, I was running my business and I didn't make instalment payments because I didn't know I had to,' then that's not going to qualify for taxpayer relief."
One of the complicating factors for small businesses is that although they don't have to file until June 15, they have to pay their 2015 taxes by April 30 (May 2 this year because the 30th falls on a Saturday). Those businesses that haven't yet completed their tax preparation are left to estimate how much they need to pay now, and if they come up short CRA will notice.
If you have to pay more than you expected because your business income was reassessed, you can pay up and still fight the reassessment.
"You can pay and file a notice of objection," Mr. Kepes says. If you win, the extra amount will be reversed, and if you don't, at least you will have prevented CRA from charging interest.
Interest on overdue tax is charged at what CRA calls "the prescribed rate," which is 5 per cent right now. In addition to overdue income tax, it applies to overdue GST or HST and most excise taxes.
Mr. Kepes says CRA will likely be lenient in cases of hardship – say, the business owner was hospitalized when the tax bill was due. "Also, sometimes due to the CRA's own delay in reaching a settlement, they may have caused unnecessary delay and they'll reduce the interest."
If you claim "undue financial hardship," you will have to prove it. "You'll have to show financial records, maybe a net worth statement, your income and assets. Obviously if a person can afford to pay the interest the CRA is not going to waive it," Mr. Kepes says.
It's important to bear in mind that while CRA can reduce interest and penalties, it has no power to reduce the amount of tax you owe once it is confirmed. "The only way you can do this is to go under the Bankruptcy Act – either to make a proposal to your creditors or actually go bankrupt," Mr. Kepes says.
"They're not great choices. But the CRA has the same rights as any other creditor," he adds.
Nine out of 10 taxpayers in Canada pay on time, according to CRA. For those who are tempted to be in the minority, Ms. Taub advises that they set aside funds and pay instalments regularly.
"People are forced to tap into lines of credit or credit cards to pay, and then they change their ways," she says.