This is one of a series of articles aimed at helping you navigate the Canadian tax system and, when necessary, prepare responses when Revenue Canada asks questions.

 

You get a letter from the CRA telling you that you owe $100,000 in back taxes. What do you do?

OPTION 1

You can cash in a few investments and pay it off in one lump sum.

OPTION 2

You can sell an asset, like your cottage. Although this takes time, CRA will be satisfied if you pay off what you owe in six months.

Problem: The cottage needs work and will take longer than six months to sell.

Solution If you can close within a year, a phone call to CRA and 12 post-dated cheques covering the full amount will do the trick.

Taking out a loan will save you money. The CRA’s interest rate—currently 5%—is higher than bank rates and is compounded daily. This means on a $100,000 tax bill, after 12 months you’ll owe an additional $5,110 in interest on top of any CRA penalties, says Angela M. Ross, principal, high net worth tax services at PricewaterhouseCoopers in Toronto.

OPTION 3

You can’t sell any assets and have no choice but to take out a loan.

Problem: You only get approved for $50,000.

Solution CRA will force you to take whatever the bank will give you, and come up with a plan to repay the rest.

Knowing that you owe $100,000, the bank will consider whether you’re able to service the $50,000 bank loan while also making payments for the remaining balance.

they’ll say:

“Your budget shows $3,000 a month available and you have an investment of $50,000,” says Charles Leibovich, regional tax leader at MNP in Montreal. “CRA will want that $50,000. But if you are co-operating, you may avoid having to cash in your investment.

Instead, they [may] accept monthly installments.”

OPTION 4 Your bank won’t loan you the money; CRA will ask to see the rejection letter and your monthly budget.

CRA will negotiate a repayment plan so you aren’t pushed to bankruptcy.

Tax cheats beware

Celebrities aren’t above the law when it comes to paying taxes.

In May 2013, singer Lauryn Hill of Fugees fame got a three-month prison sentence for failing to pay about $1 million in taxes over the past decade.

Shakespeare fans, meanwhile, may be shocked to learn he was pursued for tax evasion. In 1598, the Bard was also prosecuted for hoarding grain.

There are, however, many legitimate ways to save on taxes:

1.

Family caregiver tax credit: A nonrefundable tax credit that provides relief to caregivers of dependant relatives, including sick spouses, common-law partners, and minor children.

2.

Medical expense tax credit: Recently, in recognition of the medical and disability- related costs incurred by caregivers, the $10,000 limit on the amount of eligible expenses was removed.

3.

First-time homebuyers’ tax credit: Helps with home purchase costs, such as legal fees.

4.

Hiring credit for small businesses: Companies that meet certain criteria, and paid more in Employment Insurance premiums in 2013 over 2012, are eligible for the credit, which puts up to $1,000 back into the accounts of job creators.

5.

Textbook tax credit: Students must first claim their credit on their own returns, but may also transfer unused amounts to a parent, grandparent, spouse or common- law partner.

6.

Universal childcare benefit: Offers families with children under six with $100 per month for each child.

7.

Registered disability savings plan: It’s a long-term savings plan to help Canadians with disabilities and their families.

Compiled by Christopher Mason, a Toronto-based financial writer.