Your client gets a letter from the CRA telling her she owes $100,000 in back taxes. How do you help?

OPTION 1

She’s wealthy, so if she cashes in a few investments she can pay it off in one lump sum.

OPTION 2

She has to sell an asset, like her cottage. Although this takes time, CRA will be satisfied if she pays off what she owes in six months.

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

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

bonus!

Taking out a loan will save her 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 she’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

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

Problem: She only gets approved for $50,000.

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

Warning!

Knowing she owes $100,000, the bank will consider whether she’s 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 Her bank won’t loan her the money; CRA will ask to see the rejection letter and her monthly budget.

CRA will negotiate a repayment plan so the client isn’t pushed to bankruptcy.

Example

One of accountant Blair Corkum’s clients had a $10,000 bill for back taxes. She wasn’t working and planned to go back to school, so she was ineligible for a bank loan. “CRA agreed to defer any action and hold off on charging interest for two years until she graduated, at which point they would revisit the repayment plan.” Besides proof of a loan rejection, CRA also required proof of school enrolment.

Sources: Blair Corkum, CA, RFP, CFP, CLU, partner at Corkum & Arsenault Chartered Accountants in Charlottetown, PEI; Angela M. Ross, principal, high net worth tax services at PricewaterhouseCoopers in Toronto; Charles Leibovich, regional tax leader, Montreal, at MNP.

Tax cheats beware

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

In May, 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:

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.

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.

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

Hiring credit for small businesses: Companies that meet certain criteria, and paid more in Employment Insurance premiums in 2012 over 2011, are eligible for the credit, which puts up to $1,000 back into the accounts of job creators.

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.

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

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