What to Do If You Owe the CRA in Canada 2025

Updated March 2025 · 11 min read · bremo.io

Owing money to the Canada Revenue Agency (CRA) is a stressful situation — the CRA has more powerful collection tools than any other creditor, including the ability to garnish wages and freeze bank accounts without a court order. But there are also more options available to address CRA debt than many people realize, including formal insolvency options that provide legal protection. This guide walks through everything you need to know.

Act immediately. CRA debt grows quickly with interest compounding daily. Unlike commercial debt, the CRA does not negotiate write-downs for most taxpayers — but they do offer payment arrangements, and formal insolvency options can include most CRA debts.

Types of CRA Debt

Not all CRA debts are treated equally. Understanding what you owe matters:

Personal income tax debt: Amounts owed from filed or assessed tax returns. Can generally be included in consumer proposals and bankruptcy (subject to some exceptions).
HST/GST collected but not remitted: If you were collecting HST/GST as a business and failed to remit it, the CRA is treated as a "deemed trust" creditor — this debt has priority status and may not be dischargeable the same way as personal income tax.
Payroll source deductions: If you operated a business and didn't remit payroll deductions (CPP, EI, income tax withheld from employees), this is also a deemed trust claim with priority status.
Director liability: If you were a director of a corporation that didn't remit source deductions or HST, you may be personally liable.

CRA's Collection Powers

The CRA does not need to go to court before taking collection action. Under the Income Tax Act and the Excise Tax Act, the CRA can:

Issue a Requirement to Pay: Sent to your bank or employer, directing them to withhold and remit funds to the CRA — your account can be frozen or wages garnished without prior warning
Intercept tax refunds and benefit payments (except certain benefit payments to low-income Canadians)
Register a lien against real property
Seize and sell assets in some circumstances

These powers make CRA debt different from commercial debt — the CRA can act very quickly once they decide to collect.

Step 1: File All Outstanding Tax Returns

If you have unfiled returns, file them immediately — even if you cannot pay. The CRA charges both interest on amounts owing and penalties for late filing. The penalties are substantial (5% of balance plus 1% per month for up to 12 months). Filing the return stops the late-filing penalty from growing, even if you can't pay yet. Filing also prevents the CRA from issuing a "notional assessment" — an estimate of what they think you owe, often much higher than reality.

Step 2: Contact the CRA

Call the CRA Collections line and explain your situation. Ask about a payment arrangement (see our CRA payment arrangements guide). The CRA will consider arrangements when they believe it's the best available option for collecting the debt. You must be current on filing requirements to qualify for an arrangement.

Step 3: Consider Taxpayer Relief

The CRA's Taxpayer Relief provisions (formerly Fairness Program) allow the CRA to waive or cancel penalties and interest in certain circumstances:

Extraordinary circumstances (natural disaster, severe illness, accident)
Actions of the CRA (processing delays, incorrect information given)
Financial hardship (where collection of the tax and penalties would cause undue hardship)

This does not reduce the underlying tax debt — only the interest and penalties. Applications are made on Form RC4288.

Step 4: Formal Insolvency Options

If your CRA debt is unmanageable and cannot be addressed through a payment arrangement, formal insolvency options are available:

Consumer Proposal

Personal income tax debt to the CRA can be included in a consumer proposal under the BIA. The CRA is a creditor like any other unsecured creditor for personal income tax debt — they must be included in the proposal and vote on it. The CRA is often the largest creditor in consumer proposals. They will vote based on whether the proposal represents a better return than bankruptcy. A well-structured proposal that offers more than bankruptcy proceeds is typically accepted by the CRA.

Bankruptcy

Personal income tax debt is generally dischargeable in bankruptcy. However, debts arising from fraud (including tax fraud) are not dischargeable. GST/HST and payroll source deduction deemed trust debts may have priority and complicate the bankruptcy process.

Important: The stay of proceedings in both consumer proposals and bankruptcy immediately stops CRA collection actions — including wage garnishments and Requirement to Pay notices against your bank account. This can provide critical relief while your situation is resolved.

What Not to Do

Don't ignore CRA notices — every letter that goes unanswered escalates the situation
Don't transfer assets to family members to avoid CRA collections — this can be reversed as a fraudulent transfer
Don't borrow at high interest to pay CRA — explore all options first
Don't hire unregulated "tax debt" companies that charge large fees without being tax lawyers or accountants

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