When it comes to financial health, few things are as important as maintaining a good credit score. It affects your ability to borrow money, secure a mortgage, and sometimes, even your job prospects. Another given in life is that we will all owe tax debt at some point or another. If you’re facing tax debt currently, you might be wondering how it impacts your credit score. A common concern among Canadians is whether owing taxes to the Canada Revenue Agency (CRA) can impact their credit score. 9 times out of 10, owing money to the CRA does not have a negative impact on your credit score. If, however, the CRA struggles to collect tax debt from you, they are well within their rights to escalate their collection powers, which could in turn affect your credit score. In this article, we explore the issue in more detail to provide clarity and guidance. So, does owing taxes affect your credit score in Canada?
What is the relationship between tax and credit scores?
First and foremost, it’s important to remind ourselves that our credit score is based on the information in our credit report. Our credit report details information including payment history, amounts of debt owed, the length of credit history, new credit, and various types of credit that may be used. Canada’s two primary credit bureaus, Equifax and TransUnion, will not have direct access to information about your tax obligations unless it becomes a public record.
Does owing taxes affect your credit score in Canada?
What many Canadians may be unaware of is that the CRA has a privacy policy, and doesn’t share all your information with other entities, including the Canadian credit bureaus. This means that it doesn’t report your personal tax information unless your taxation issues become serious. Let’s say, for instance, you have a hefty tax debt bill and have avoided it for some time, without any attempt at trying to resolve the situation. The CRA is already unrivalled in its powers as a creditor to collect, often resorting to wage garnishments, bank account freezes, and even placing liens on property in an attempt to regain the money owed in tax debt. Should your unresolved tax debt lead to a formal court case, your tax debt would become public record, and the credit bureaus would collect and report on this information. If the CRA engages a collection agency to collect your debt on their behalf, this can also become public record. At this point, it would begin to affect your credit score negatively.
When does tax debt impact your credit score?
Owing money to the CRA doesn’t automatically affect your credit score. However, if you fail to pay your taxes and do not make arrangements to settle your debt, the CRA can take actions that may indirectly impact your credit rating. Here are the key scenarios where unpaid taxes could affect your credit score:
- Legal actions and liens: if the CRA places a lien on your property as security against the tax debt, this lien can appear on your credit report. Once registered, a tax lien is a public record that can significantly damage your credit score.
- Collections and legal judgments: in more severe cases, if the tax debt leads to legal judgments or the account is transferred to a collection agency, these actions will be reported to credit bureaus and can negatively impact your credit score.
- Repeated non-payment: consistently failing to make payment arrangements or settle tax debts can lead to more aggressive recovery actions by the CRA, which may eventually be reflected in your credit history if they involve legal proceedings.
How does tax debt affect your credit score?
As we have covered, filing your tax return and making payments to the CRA don’t affect your credit score. Equally, if you are late in paying your taxes, are struck with CRA penalties or interest, or owe a relatively small amount of tax debt, your credit score will likely be unaffected. The CRA will typically attempt to resolve minor tax issues directly with the taxpayer relatively quickly, without escalation. If these tax issues go unresolved, this is when your credit score could become impacted. If the CRA doesn’t receive any communication from the individual, the situation could escalate. This is when they take more severe actions, which can appear on your credit report and impact your credit score negatively. This is why it’s important to address any tax debt issues you’re facing as soon as possible, and to communicate with the CRA.
Does payment history affect credit score?
Generally speaking, yes – payment history has a major impact on your credit score. See our article on factors that influence your credit score. When it comes to tax, however, payment history isn’t included on your credit report. The CRA has a privacy policy and doesn’t share taxpayers’ payment history with the credit bureau. For this reason, until tax debt situations escalate, payment history of your taxes doesn’t affect your credit score.
How can you protect your credit score when you owe taxes?
If you can’t pay your taxes in full, you need to do what you can in order to protect your credit score. This includes taking the following steps:
- Communicating with the CRA: contact the CRA to discuss your situation as soon as possible. You may be eligible for a payment arrangement that allows you to pay your taxes over time.
- Speak to a Licensed Insolvency Trustee: Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This makes them well placed to provide you with strategies to manage your tax debt and safeguard your credit if you are struggling with overwhelming tax bills.
- Monitor your credit report: keep an eye on your credit report to ensure there are no inaccuracies or unexpected entries related to tax debts.
- Stay on top of your finances: create a budget, try to save, pay bills in full and on time, and prepare for large costs.
- Make a partial payment: if you’re able to afford it.
- Consider taxpayer relief: and other financial hardship options offered by the CRA.
What if you can’t afford your tax debts?
Firstly, don’t panic. No matter how bad you might think your financial circumstances are, there is always a solution. At Spergel, our team of ‘get rid of debt’ people have been helping Canadians to combat their tax debt bills for over 34 years. The most important thing to remember is that you have options when it comes to debt relief. The key is to communicate well with the CRA – they are generally willing to work with individuals to make their repayments more manageable. They may be able to offer you taxpayer relief, or to arrange a payment plan, but this only comes from speaking to them and being honest about your situation. Unfortunately, the CRA will not be able to significantly support most individuals, which is where a formal form of debt relief could be helpful in substantially reducing your unsecured debts or eliminating them completely. This includes the following types of debt relief:
- Filing a consumer proposal – a consumer proposal is a legal form of debt settlement, whereby your Licensed Insolvency Trustee will negotiate with your creditors on your behalf. The goal is to agree on a reasonable monthly repayment of your debts that will benefit creditors more than they would via a bankruptcy, and while reducing your debts by up to 80%. Advantages of a consumer proposal include the ability to keep your assets, and protection from your creditors. At Spergel, we have a 99% acceptance rate on any consumer proposals that we file.
- Filing bankruptcy – bankruptcy is the process of assigning any non-exempt assets you may have over to your Licensed Insolvency Trustee in exchange for the clearance of your unsecured debts. These assets are then sold, with the proceeds going towards the repayment of your creditors. It’s the best way to a fresh financial future, and often gives a renewed sense of hope and financial stability. Although many Canadians believe that bankruptcy leaves you with nothing, this is far from the reality. Each province has its own list of bankruptcy exemptions, allowing you to keep essential assets within a certain value threshold.
What happens if you don’t pay your taxes?
Having outstanding tax debts should be taken more seriously than other debts you may have due to the unrivalled collection powers of the CRA. Unlike other creditors, they don’t require a court order to take actions against you, including garnishing your wages, placing a lien on your property, or freezing your bank account. If they don’t receive full repayment, they can pursue further action and could hire a collection agency, take legal action against you, or put a tax lien on your credit report. All of these activities will negatively impact your credit score. This could make it increasingly difficult for you to rebuild your credit score. While tax debt can feel overwhelming, there are plenty of solutions, and even the CRA will try to work with you to make your repayments as manageable as possible.
Does owing taxes affect your credit score in Canada? FAQs
Here are some of the most common questions we receive about how taxes can affect your credit score in Canada.
What happens if you owe back taxes in Canada?
If you owe back taxes in Canada, the CRA will take several steps to collect the outstanding debt. Initially, you’ll receive notices demanding payment. If these are ignored, the CRA might apply penalties and interest, which can accumulate quickly. Without a payment arrangement in place, the CRA has the authority to enforce collection. This could include garnishing your wages, seizing funds from your bank accounts, or placing a lien on your property. These actions can have significant financial consequences and can affect your credit score if they involve legal proceedings that become public. It’s essential to address any tax debts promptly by communicating with the CRA, potentially arranging a payment plan, or consulting with a Licensed Insolvency Trustee for guidance on managing the debt effectively.
Can I get a mortgage if I owe taxes in Canada?
Getting a mortgage in Canada while owing taxes is challenging but not impossible. Mortgage lenders typically require proof that you have no tax liabilities before they approve a loan because outstanding taxes can signal financial instability and increase the lender’s risk. However, if you have entered into a payment arrangement with the CRA and are consistently making payments, lenders may consider this as a mitigating factor. It’s crucial to demonstrate that you’re managing your tax debt responsibly. Additionally, providing a larger down payment or finding a co-signer might improve your chances of securing a mortgage. Consulting with a Licensed Insolvency Trustee or a mortgage broker can also help navigate your specific situation more effectively.
Does a lien affect your credit in Canada?
In Canada, a lien on your property can indeed affect your credit score. When a lien is placed on your assets, particularly real estate, it’s often registered and becomes a matter of public record. Credit bureaus may then include this information in your credit report. The presence of a lien indicates a serious delinquency in payments, whether it’s for unpaid taxes, contractors’ fees, or other debts, and can significantly lower your credit score. Additionally, a lien can make it more difficult to obtain future credit, refinance existing loans, or sell the property until the debt is settled and the lien is removed. For these reasons, a lien should be addressed as promptly as possible to minimize its impact on your financial health.
So, does owing taxes affect your credit score in Canada? While owing taxes doesn’t directly impact your credit score, the actions the CRA could take if you don’t communicate with them and fail to pay could. For this reason, you should address your tax debts quickly and seek appropriate support if you can’t pay. For expert advice on managing your tax debts, book a free consultation with a Licensed Insolvency Trustee at Spergel today.
