Instalment Payment Plans for Canadian Taxes: CRA Payment Arrangements

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Instalment Payment Plans for Canadian Taxes: CRA Payment Arrangements

Mar 20, 202621 min read

Owing money to the Canada Revenue Agency can be one of the most stressful financial situations a Canadian can face. Unlike other creditors, the CRA has extraordinary powers to collect what you owe — they can garnish your wages, freeze your bank accounts, and place liens on your property, often without needing to go to court first. But here is what many Canadians do not realize: the CRA is often willing to work with you on a payment plan, and there are formal processes in place to arrange affordable instalment payments on your tax debt.

This comprehensive guide covers everything you need to know about CRA payment arrangements, from how to set one up to what happens if you cannot pay at all. Whether you owe $500 or $50,000, understanding your options can help you resolve your tax debt without losing everything.

Understanding Your CRA Tax Debt

Before diving into payment arrangements, it is important to understand the different types of tax debt and how CRA interest and penalties work.

Types of Tax Debt

• Income tax owing: The most common type — the amount remaining after your tax return is assessed and any credits, deductions, and source deductions are applied
• GST/HST debt: Amounts owing from GST/HST collected by self-employed individuals or businesses
• Payroll remittance debt: For employers who have not remitted employee source deductions (income tax, CPP, EI)
• Benefit overpayments: Amounts the CRA paid you in benefits (CCB, GST/HST credit, CWB) that you were not entitled to receive
• Reassessment debt: Additional amounts owing after the CRA reassesses a previous return (audit adjustments)

How CRA Interest Works

The CRA charges compound daily interest on all overdue amounts. The interest rate is set quarterly and is based on the Government of Canada’s 90-day treasury bill rate plus a prescribed margin.

Key points about CRA interest:

• Interest is compounded daily, not monthly or annually
• Interest accrues on the outstanding balance including any penalties
• Interest is not tax-deductible for personal income tax debts
• The CRA does not negotiate interest rates — the prescribed rate applies to everyone
• Interest continues to accrue even during a payment arrangement

CRA Penalties

In addition to interest, the CRA may impose penalties in several situations:

CRA Payment Arrangement Options

The CRA offers several ways to manage your tax debt. The right option depends on your financial situation, the amount you owe, and your ability to pay.

Option 1: Pay in Full Immediately

If you can possibly pay the full amount, this is always the best option. It stops interest from accruing and prevents any enforcement action. The CRA accepts payment through:

• Online banking (bill payment to “Canada Revenue Agency”)
• My Payment (online through CRA My Account using Interac Debit)
• Pre-authorized debit through My Account
• Credit card (through third-party providers — fees apply)
• At your bank (in person)
• By mail (cheque or money order)

Option 2: Instalment Payment Arrangement

If you cannot pay in full, you can request a payment arrangement with the CRA. This is an agreement to pay your debt in regular instalments over a period of time.

1. Step 1: Gather Your Financial Information
   Before contacting the CRA, prepare a complete picture of your financial situation. You will need: monthly income from all sources, monthly essential expenses (rent/mortgage, utilities, food, transportation, childcare), other debts and minimum payments, bank account balances, and assets. The CRA will want to verify that the payment amount you propose is reasonable given your overall financial situation.

2. Step 2: Determine What You Can Afford
   Be realistic about what you can pay each month while still covering your essential living expenses. The CRA will generally expect you to pay as much as you can — they are unlikely to accept a token payment of $50 per month on a $20,000 debt if your income shows you can afford more. However, they will also not demand payments that would leave you unable to meet basic needs.

3. Step 3: Contact the CRA
   You can request a payment arrangement in several ways:

   • Online: Through My Account at canada.ca — for debts under $25,000, you can set up a payment arrangement online without speaking to anyone
   • By phone: Call the CRA’s individual tax enquiries line at 1-800-959-8281
   • Through your accountant or tax professional: If you have authorized a representative, they can negotiate on your behalf

4. Step 4: Negotiate the Terms
   When you speak with a CRA agent (or set up the arrangement online), you will discuss: the monthly payment amount, the frequency of payments (monthly, bi-weekly, or weekly), the method of payment (pre-authorized debit is preferred), and the expected duration of the arrangement. The CRA generally wants the debt paid within 6 to 24 months, but longer arrangements are possible for larger debts.

5. Step 5: Set Up Pre-Authorized Debit
   The CRA strongly prefers pre-authorized debit (PAD) for payment arrangements. This ensures payments are made automatically and on time, reducing the risk of default. You can set up PAD through My Account or by completing Form CPPAD1, Agreement for Pre-Authorized Debit for Individual Accounts.

6. Step 6: Make a Good Faith Payment
   If possible, make a lump-sum payment when you set up the arrangement. Even if it is a small amount, this demonstrates good faith and can make the CRA more willing to agree to your proposed terms. It also immediately reduces the principal, slowing interest accumulation.

Option 3: Taxpayer Relief (For Penalties and Interest)

If you have experienced circumstances beyond your control that prevented you from meeting your tax obligations, you can request relief from penalties and interest under the CRA’s Taxpayer Relief provisions (formerly known as the Fairness Program).

Qualifying circumstances may include:

• Serious illness or accident
• Emotional or mental distress (such as a death in the family)
• Natural disaster (fire, flood, earthquake)
• Civil disturbance or disruption in services (postal strike, for example)
• CRA errors or processing delays
• Financial hardship that made it impossible to pay

How to Apply for Taxpayer Relief:

You can apply using Form RC4288, Request for Taxpayer Relief — Cancel or Waive Penalties and Interest. This form can be submitted:

• Online through My Account
• By mail to your tax centre
• Through a tax professional authorized as your representative

The CRA can only grant relief for penalties and interest that accrued within the previous 10 calendar years. Requests must be specific about which penalties and interest amounts you want cancelled or waived.

Option 4: Voluntary Disclosures Program

If you have unreported income, unfiled returns, or other tax issues that you have not yet disclosed to the CRA, the Voluntary Disclosures Program (VDP) allows you to come forward and correct your tax affairs. Under certain conditions, the VDP may result in reduced penalties and relief from prosecution.

Requirements for a valid voluntary disclosure:

1. It must be voluntary — the CRA must not already be aware of the issue
2. It must involve a penalty or potential penalty
3. It must include information that is at least one year past due
4. It must include complete information about the disclosure

What Happens If You Do Not Pay: CRA Collection Powers

Understanding what the CRA can do if you do not pay or arrange to pay is important for motivating action. The CRA has among the most powerful collection tools of any creditor in Canada.

The CRA Collection Timeline

Here is a general timeline of what happens when you owe the CRA and do not pay:

CRA Enforcement Tools

Requirement to Pay (Wage Garnishment):
The CRA can issue a Requirement to Pay to your employer, requiring them to send a portion (or all) of your paycheque directly to the CRA. This can be up to 50% of your gross employment income for regular wages. For contract or self-employment income, the CRA can garnish up to 100%.

Frozen Bank Accounts:
The CRA can issue a Requirement to Pay to your bank, freezing your accounts and directing the bank to send the balance to the CRA. This applies to chequing accounts, savings accounts, and even some investment accounts.

Property Liens:
The CRA can register a lien (called a certificate of debt) against your real property (home, land, cottage) at the provincial land registry. This means you cannot sell or refinance the property without first paying the CRA debt.

Seizure of Assets:
In extreme cases, the CRA can seize and sell your assets to pay the debt. This can include your home, vehicle, or other valuable property.

Offsetting Government Payments:
The CRA can redirect government payments you would normally receive — including GST/HST credits, Canada Child Benefit payments, income tax refunds, and other federal payments — to pay down your tax debt.

Offsetting Refunds Against Your Debt

One important aspect of CRA debt that catches many Canadians off guard is the CRA’s practice of automatically offsetting future tax refunds and government benefit payments against outstanding balances.

How Offsetting Works

If you owe money to the CRA and are owed a refund for a subsequent tax year, the CRA will automatically apply your refund to your outstanding debt. You do not need to request this — it happens automatically and cannot be prevented.

Payments that can be offset include:

• Income tax refunds
• GST/HST credit payments
• Canada Child Benefit (CCB) payments
• Canada Workers Benefit (CWB) payments
• Climate Action Incentive payments
• Provincial benefit payments administered by the CRA

Impact on Families

The offsetting of Canada Child Benefit payments is particularly concerning for families. If one parent owes the CRA, the CCB payments for the entire family can be redirected to the debt. This can leave families without the funds they need to care for their children.

If you are in this situation, contact the CRA immediately to discuss options. In some cases, the CCB can be redirected to the other parent, or a payment arrangement can be set up that allows the CCB to continue flowing while the debt is paid off through other means.

When CRA Sends Your Debt to Collections

In certain circumstances, the CRA may refer your debt to a private collection agency. This typically happens when:

• The CRA has been unable to reach you through its own collection efforts
• You have left Canada without resolving your tax debt
• The account has been inactive for an extended period

Important protections:

• Private collection agencies acting on behalf of the CRA must identify themselves and disclose that they are collecting for the CRA
• They must follow provincial collection practices legislation
• They cannot charge you any additional fees — their commission is paid by the CRA
• You can still negotiate a payment arrangement with the CRA directly even if the account is with a collection agency

Strategies for Managing Your CRA Payment Arrangement

Once you have a payment arrangement in place, here are strategies to manage it effectively and potentially pay off your debt faster.

Maximizing Your Payments

Because interest continues to accrue on your outstanding balance during a payment arrangement, paying more than the agreed minimum whenever possible is crucial. Even an extra $50 or $100 per month can significantly reduce the total interest you pay and shorten the duration of the arrangement.

Example: Impact of Extra Payments

Note: These are approximate figures based on a 9% annual interest rate compounded daily.

Using Your Tax Refund Strategically

As mentioned earlier, the CRA will automatically offset your tax refund against your debt. Rather than viewing this negatively, you can use it strategically by adjusting your withholding to maximize your refund. While financial advisors typically recommend reducing your refund (since it is an interest-free loan to the government), when you owe the CRA, maximizing your refund effectively acts as a forced savings mechanism that accelerates your debt repayment.

Considering a Consolidation Loan

If you can qualify for a personal loan or line of credit at an interest rate lower than the CRA’s prescribed rate, it may make sense to borrow from a financial institution to pay off the CRA and then repay the loan. Advantages include:

• Potentially lower interest rate (especially with a secured product)
• Stops the CRA’s enforcement powers
• Fixed repayment schedule with a defined end date
• Removes the stress of dealing with the CRA

Required Instalment Payments: Avoiding Future Debt

One common reason Canadians end up owing the CRA is that they are required to make quarterly instalment payments but do not realize it until they file their tax return and face a large balance owing.

Who Must Pay by Instalments?

The CRA requires quarterly instalment payments from individuals who expect to owe more than $3,000 in federal and provincial tax ($1,800 in Quebec for federal tax only) in the current year and who owed more than $3,000 in either of the two preceding tax years.

This commonly affects:

• Self-employed individuals and freelancers
• Landlords with rental income
• Retirees with pension income that has insufficient tax withheld
• Investors with significant capital gains, dividends, or other investment income
• Individuals with multiple sources of income

Instalment Due Dates

Three Methods for Calculating Instalments

The CRA allows you to use one of three methods to calculate your quarterly instalments:

1. No-calculation method: Pay the amounts shown on the instalment reminder (Form INNS1) that the CRA sends you. This is the simplest method but may result in overpayment if your income has decreased.
2. Prior-year method: Base each payment on one-quarter of your net tax owing from the previous year.
3. Current-year method: Estimate your current year’s tax and pay one-quarter each period. This is the most accurate but requires you to estimate your income.

Special Situations

Owing for Multiple Tax Years

If you owe for more than one tax year, the CRA will generally apply your payments to the oldest debt first (since it has accumulated the most interest). However, you can request that payments be applied differently if there is a strategic advantage to doing so — for example, paying off a year with higher penalties first.

Self-Employed Tax Debt

Self-employed Canadians face particular challenges with tax debt because they are responsible for both the employee and employer portions of CPP contributions, they do not have taxes withheld at source, and they may have GST/HST obligations in addition to income tax.

If you are self-employed and owe the CRA, consider whether your future instalment payments are adequate. Setting up a separate bank account for tax savings — depositing 25% to 30% of every dollar earned — can prevent the cycle from repeating.

Deceased Taxpayer Debt

If a family member has passed away owing money to the CRA, the debt becomes the responsibility of the estate. The executor or administrator of the estate must file the deceased’s final tax return and arrange payment of any balance owing from estate assets. The CRA cannot pursue surviving family members personally unless they were co-liable (such as joint business owners).

Tax Debt and Insolvency

If your CRA debt is part of a larger financial crisis, formal insolvency proceedings may be an option:

• Consumer Proposal: A legally binding agreement administered by a Licensed Insolvency Trustee where you offer to pay creditors (including the CRA) a percentage of what you owe over a maximum of five years. CRA debt, including income tax, GST/HST, and source deductions, can be included.
• Bankruptcy: As a last resort, personal bankruptcy eliminates most debts, including CRA tax debt. However, it has significant consequences for your credit, and certain debts (like court-ordered fines) are not dischargeable. The CRA is treated as a preferred creditor in bankruptcy, meaning they may receive a larger share of your assets than other unsecured creditors.

How CRA Debt Affects Your Credit Report

CRA tax debt does not directly appear on your credit report with Equifax or TransUnion Canada. The CRA does not report to the credit bureaus in the way that banks, credit card companies, and other lenders do. However, CRA debt can indirectly affect your credit in several ways:

• Property liens: When the CRA registers a certificate of debt (lien) against your property, this becomes part of the public record and may be discovered during credit checks or title searches
• Garnishment effects: If the CRA garnishes your wages and you can no longer make payments on other debts, those missed payments will appear on your credit report
• Bank account seizure: If the CRA seizes your bank account and payments to other creditors bounce, this will affect your credit
• Insolvency: If you file a consumer proposal or bankruptcy to deal with CRA debt, this will be reported on your credit file

Tax Debt and Your Mortgage Application

If you are applying for a mortgage while owing the CRA, here is what you need to know:

• Most mortgage lenders will ask if you have any CRA debt as part of the application process
• Having an active CRA payment arrangement that you are maintaining in good standing is viewed more favourably than an unaddressed tax debt
• CRA liens on your property can prevent mortgage approval or refinancing
• Some lenders may require the CRA debt to be paid off from the mortgage proceeds at closing
• Your CRA payment arrangement amount will be factored into your Total Debt Service (TDS) ratio

Preventing Future Tax Debt

The best way to deal with CRA tax debt is to prevent it from occurring in the first place. Here are practical strategies:

For Employees

• Review your TD1 form with your employer to ensure adequate tax is being withheld
• If you have income from multiple sources, request additional tax withholding from one employer using Form TD1X
• If you receive taxable benefits (company car, stock options), ensure these are being taxed appropriately at source

For Self-Employed Individuals

• Open a separate savings account dedicated to taxes
• Transfer 25% to 30% of every payment received to this account
• Make quarterly instalment payments on time
• Work with an accountant to estimate your tax liability throughout the year
• Register for GST/HST when required and set aside collected amounts

For Investors and Retirees

• Request tax withholding on pension payments using Form T1213
• Make quarterly instalment payments if required
• Plan capital gains realizations strategically to manage tax liability
• Consider tax-efficient withdrawal strategies from registered accounts

1. Step 1: Know Your Tax Obligations
   Determine whether you are required to make quarterly instalment payments. Check your previous year’s Notice of Assessment and the CRA’s My Account portal for instalment reminders.

2. Step 2: Automate Your Tax Savings
   Set up automatic transfers from your main account to a dedicated tax savings account every time you receive income. For self-employed individuals, 25% to 30% is a good starting point.

3. Step 3: Make Instalment Payments on Time
   Set calendar reminders for the four quarterly instalment dates (March 15, June 15, September 15, December 15). Consider setting up pre-authorized debits through the CRA’s My Account.

4. Step 4: File and Pay on Time
   Even if your finances are tight, always file your return by the deadline and pay as much as you can. File first, pay later is always better than file late, pay late.

Resources and Contact Information

Frequently Asked Questions