What To Do When You Can't Pay Your Taxes

Published March 30, 2026

WHAT'S IN THIS ARTICLE
Introduction | Step One | Step Two | Step Three | Funds Held In Trust | Life Happens | Installments | Next Steps | Choose Where To Go Next | Wrap-up

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You just got your return back from your bookkeeper or accountant. Or maybe you just finished entering everything yourself. Either way, you are staring at a balance owing and thinking, now what?

First, take a breath. This happens more often than you think, and it is usually not because someone was irresponsible. Most of the clients I worked with genuinely thought they had it under control. The numbers just did not land where they expected.

Here is the good news. How you handle the next few days matters far more than the fact that you owe money. CRA is not unreasonable when you act in good faith. If you make partial payments and stay in communication, they do not hassle you. It is the people who go silent and do nothing that end up in real trouble.

So let us talk about exactly what to do.

This is the single most important thing I can tell you.

File all your returns on time even if you cannot pay a single dollar of what you owe.

I know that feels counterintuitive. If you do not have the money, why file and make it official? Because the late-filing penalty is brutal, and it kicks in the moment your deadline passes whether CRA hears from you or not.

Here is what late filing actually costs you on your income tax return:

5% of the tax owing, plus 1% for each month your return is late, up to 12 months. That is potentially 17% of your balance owing before interest charges even enter the picture.

And if CRA has already hit you with a late-filing penalty in any of the three prior years, it gets worse. The penalty jumps to 10% of the balance owing plus 2% for each full month late, up to 20 months.

Example With $5,000 Owing
To put that in real numbers, imagine you owe $5,000 and you miss your filing deadline.

First Time Late Filer

• Penalty: $250 upfront (5%) plus $50 for each month unfiled, up to 12 months
• Maximum penalty: $850
• Interest: Separate, compounding daily on the full balance including penalties
• Estimated interest on $5,000: roughly $400 to $500 in the first year
• Potential first year cost: $1,200 to $1,350 on a $5,000 balance

Repeat Late Filer (penalized in a prior year)

• Penalty: $500 upfront (10%) plus $100 for each month unfiled, up to 20 months
• Maximum penalty: $2,500
• Interest: Same as above, compounding daily on the full balance
• Potential cost: over $3,000 on a $5,000 balance

And remember, none of this money does a single thing for your business. It is the most expensive way to pay CRA. Filing on time, even with nothing paid, makes every one of these numbers disappear.

Did that make you sit up and pay attention?

For your personal income tax return specifically, filing on time also protects your personal benefits like your GST/HST credit (rebranded as Canada Groceries and Essentials Benefits) and the Canada Child Benefit. That said, if you have an outstanding balance with CRA, be aware that their policy is to hold back those credit payments and apply them directly to what you owe. It is not a penalty exactly, but it does mean you cannot count on those payments hitting your bank account the way they normally would. One more reason to get the balance dealt with as quickly as possible.

A quick note for sole proprietors. Your business income and expenses are reported on a T2125 form which is filed as part of your personal T1 tax return. You cannot fully separate your business filing from your personal filing. They are one and the same document.

Even if your books are not perfect, file on time. Missing a few expense receipts is not the end of the world. You can claim input tax credits within a four-year window, and claiming them a little late is far less costly than a late-filing penalty.

That said, I want to be clear about one thing. Take the time to properly record all your income and revenue before you file. Missing expense claims is forgivable. Underreporting income is not. Skimming and moonlighting are illegal and can lead to criminal proceedings. CRA takes unreported income seriously.

One more caveat if you are thinking about filing prior period expenses or ITCs. If the amounts are material, you may need to adjust the period they actually belong to rather than just claiming them in the current period. Why does that matter? Because amending a prior period return opens that period up to CRA audit. It is not a reason to avoid correcting the record, but it is something to discuss with your bookkeeper or accountant before you proceed.

Bottom line ... file everything on time.

Think of it as a down payment.

When you file, pay whatever you can manage, even if it is a fraction of the total. This does two things. It reduces the balance that interest is calculated on, and it signals to CRA that you are acting in good faith.

Yes, you will still owe interest on the unpaid balance. CRA sets the prescribed interest rate quarterly and it compounds daily starting May 1st for personal income tax. But interest charges are significantly less painful than late-filing penalties. You are choosing the lesser of two financial hits.

Make that partial payment, then set up a payment arrangement with CRA for the rest.

This is the step most people avoid because it feels uncomfortable. Do it anyway.

And here is something many people do not know yet. You may not need to speak with a collections officer at all.

CRA rolled out new online tools in late 2025 that let you set up and manage your own payment plan directly through your secure CRA account.

If you owe $1,000 or more, look for the Manage Balance feature in My Account for individuals or My Business Account for your business accounts. From there you can set up your own payment plan on your own timeline without picking up the phone.

The tools also include a Payment Arrangement Calculator to estimate your payments and how long it will take to clear the balance, and an Income and Expense Worksheet to help you figure out what you can realistically afford to pay each month.

If you prefer automatic payments, you can set up Pre-Authorized Debit through My Account and schedule a series of payments so you do not have to think about it each month.

Not comfortable online? You can also use the automated TeleArrangement service at 1-866-256-1147 for personal tax debt. No agent required.

If neither of those options works for your situation, then yes, call CRA directly.

• Individual and self-employed: 1-888-863-8657
• Business accounts for GST/HST and payroll: 1-800-959-5525

A few important things to know before you set up your arrangement:

• You must have filed all outstanding returns before a payment arrangement can be finalized.
• Interest continues to accrue daily on the outstanding balance even while you are on a plan.
• And the sooner you set this up the better.

CRA does escalate collections on accounts that go silent, and escalation can mean wage garnishment or a freeze on your bank account. You do not want to go there.

If you collect GST/HST or have employees, the same file-first principle applies, but the penalty structures are calculated differently and the stakes are equally high.

Funds Held In Trust

Here's one thing that surprises many new business owners. GST/HST collected from your clients is a trust fund, just like payroll withholdings. That money was never yours to begin with. You collected it on behalf of the government and you are holding it until remittance time. CRA treats trust fund obligations with significantly less flexibility than other tax debts.

GST/HST Funds Held In Trust

For GST/HST returns, late-filing penalties start at 1% of the balance owing plus 0.25% for each full month the return is late, up to 12 months. It escalates if you have a history of late filing.

A Real World Scenario
Let us say you just crossed the $30,000 annual sales threshold and you are now registered for GST. You are based in Alberta so it is a clean 5% GST with no provincial component. Your annual sales are $32,000.

That means you collected $1,600 in GST over the course of the year on behalf of the government.

Here is where it goes wrong for a lot of first time registrants. That $1,600 did not sit in a separate account. It landed in your operating account with the rest of your revenue and it got spent. Maybe on supplies, maybe on a slow month, maybe just gradually without you noticing. You told yourself it would be fine because you had expenses and the ITCs would offset most of it anyway.

Then you sit down to file and the ITCs bring your balance down to $900. Which is great, except you do not have $900 either.

Now the late filing penalty kicks in. On a $900 balance it is $9 upfront plus $2.25 for each month late. That sounds manageable. But the penalty is not really the problem.

The problem is the $900 you owe that is not there. And interest is compounding on it daily. And next year the same thing is going to happen unless something changes.

First Time late on $900 Balance

• Penalty: $9 upfront plus $2.25 per month
• Maximum penalty after 12 months: $36
• Interest: Compounding daily at approximately 9%
• Estimated annual interest: roughly $81
• Total extra cost: approximately $117

That $117 is not the disaster. Owing $900 you do not have, with no plan, is the disaster.

THE FIX IS SIMPLE
The moment you collect GST from a client, move it to a separate savings account. Every single time. Do not wait until the end of the month. Do not tell yourself you will sort it out later. Move it immediately.

When filing time comes, your GST owing is already sitting there waiting. No scrambling, no shortfall, no interest, no penalty.

And here is the part that surprises people the first time they do this properly. When your ITCs reduce your balance from $1,600 down to $900, that remaining $700 is still sitting in your GST account after you file and pay. It did not vanish. You now have options for that money that do not include folding it back into your operating expenses and spending it. You could top up your income tax reserve. You could move it your profit account or take it as a personal 'bonus' draw. You could put it toward a business expense you have been putting off. The point is you get to make that decision deliberately, from a position of control, after your obligation is met. Not in a panic before it is.

And if you are currently an annual GST filer, I strongly recommend switching to quarterly. It gives you four checkpoints a year instead of one, which means four opportunities to catch a problem before it compounds. And if you are in a refund position, quarterly filing puts that money back in your pocket four times a year instead of once.

Learn why I recommend quarterly filing even when annual is an option.

Payroll Withholdings Held In Trust

For payroll remittances, the penalties are based on how late the remittance is, starting at 3% if it is one to three days late and climbing from there. If you have employees, payroll remittances are your highest priority filing obligation.

A Real World Scenario
Let us say you have two employees, both working 40 hours a week at Alberta's minimum wage of $15.00 per hour. You are a new employer so CRA has defaulted you to quarterly remittances. Your PD7A is due by the 15th of April, July, October, and January.

Here is what your payroll obligation looks like every single week.

1. Employee Weekly Paycheque

• Gross wages: $600.00
• Vacation pay at 4%: $24.00
• Total weekly earnings: $624.00

What you withhold from their paycheque before they see a dollar:

• Federal income tax: $32.96
• Alberta provincial income tax: $11.43
• CPP employee contribution: $33.12
• EI employee premium: $10.17
• Total withheld from employee: $87.68
• Net paycheque your employee receives: $536.32

Your employee never saw that $87.68. It went straight from their gross pay to a liability on your books. But here is the problem. It landed in your operating account first. And if you did not move the funds out immediately it started to feel like available cash.

2. Employer Payroll Taxes
Now here is the part that catches new employers completely off guard.

On top of what you withheld from your employees, you owe CRA your own matching contributions. This money does not come from your employees. It comes directly out of your operating account. After every single payroll run.

What you owe as the employer every week per employee:

• CPP employer match: $33.12
• EI employer premium: $14.24
• Total employer obligation per employee per week: $47.36

Your employee cost you $624.00 in earnings this week. But your total obligation to CRA for that one employee is $135.04 per week. Multiply that by two employees and you owe $270.08 every single week in source deductions and employer payroll taxes combined, before you even factor in income tax withholdings.

Add income tax withholdings for both employees at $44.39 per week each and your total weekly remittance obligation for two employees is $358.86.

Over a full quarter of 13 weeks that adds up to $3,511.04 due to CRA by the 15th of the month following the end of each quarter.

3. Quarterly Remittance Breakdown For Two Employees
(Form PD7A)

Employee side, what you withheld from their paycheques:

• Federal and Alberta income tax: $1,154.14
• CPP employee contributions: $861.12
• EI employee premiums: $264.42
• Total withheld from both employees: $2,279.68

Employer side, what comes out of your operating account:

• CPP employer match: $861.12
• EI employer premium: $370.24
• Total employer obligation: $1,231.36

Total quarterly remittance due to CRA: $3,511.04

🦆Note: This example does not include Workers Compensation Board premiums. WCB rates vary by industry and are set provincially. As an Alberta employer you are required to register with WCB Alberta if you have workers other than yourself. WCB premiums are an employer only obligation and are never deducted from your employee's paycheque.

NOW HERE IS WHERE IT GOES WRONG
You ran payroll every week. You paid your employees their $536.32 net paycheque. But you did not move the withheld amounts and your employer portions out of your operating account after each payroll run.

Thirteen weeks later you owe CRA $3,511.04 and it is gone. Not stolen, not wasted, just quietly absorbed into your day to day operating expenses one week at a time. Supplies here, a slow week there, an expense that felt urgent. It disappeared without you even noticing because it was never separated from your available cash.

And unlike GST/HST where the money came in as extra and felt like yours, this is even more insidious. Your employees got paid correctly every week. Everything looked fine on the surface. The liability was invisible until the 15th arrived.

WHAT HAPPENS IF YOU MISS THE QUARTERLY DEADLINE
Late remittance penalties on $3,511.04:

• 1 to 3 days late at 3%: $105.33
• 4 to 5 days late at 5%: $175.55
• 6 to 7 days late at 7%: $245.77
• More than 7 days late at 10%: $351.10
• Repeat failure or CRA demand at 20%: $702.21

And remember, interest compounds daily on the outstanding balance on top of every one of those penalties.

But the penalty is not really the disaster. Owing $3,511.04 you do not have, with two employees counting on you every week, is the disaster.

THE FIX IS SIMPLE
After every single payroll run, transfer two amounts out of your operating account immediately.

The first transfer is the total withheld from your employees' paycheques. Federal and provincial income tax, CPP employee contributions, and EI employee premiums. That money was never theirs and it was never yours. Move it out the same day you run payroll.

The second transfer is your employer portion. Your CPP match and your EI premium. This one comes entirely from your side of the ledger. It has to come out of operating every single payroll run without exception. If you wait until the quarterly deadline to think about it, it will already be gone.

Move both amounts into a dedicated payroll remittance savings account immediately after every payroll. When the 15th arrives your obligation is already sitting there waiting. No scrambling, no shortfall, no penalty, no stress.

If you know yourself well enough to know that a healthy looking bank balance is a temptation you cannot always resist, take it one step further. Many small employers move the full gross payroll amount plus the employer CPP and EI obligations into a separate payroll bank account and run payroll entirely from there. Your operating account never sees that money at all. What you cannot see you cannot spend. It keeps your operating account clean, your payroll account purposeful, and your remittance obligations completely visible at a glance.

One thing to watch. Unlike the GST example where a balance remaining after filing just means your ITCs did the job, a leftover balance in your payroll account after you have paid your PD7A is a signal to check your calculations. Your payroll remittance account should come out close to zero each quarter if you are transferring the right amounts. A consistent surplus means you are over-transferring. A consistent shortfall means you are under-transferring. Either way it is worth finding out why.

The Bottom Line

The bottom line is the same across all of them. File everything on time.

I mentioned that CRA treats trust fund obligations with significantly less flexibility than other tax debts. What I should have said is they are like a dog with a bone. They go aggressively after business owners who have filed and paid funds held in trust.

If you have missed filing deadlines from previous years, the most important thing you can do right now is file those returns voluntarily before CRA contacts you.

A CRA demand letter changes everything. Once they come to you, your options narrow considerably. If you come to them first through the Voluntary Disclosure Program, you may be able to reduce or eliminate penalties and in some cases interest.

That said, Voluntary Disclosure is not always the right move, and going in without understanding the program can sometimes do more harm than good.

Learn more about how it works and whether it makes sense for your situation before you decide. Here's the link: Is Voluntary Disclosure The Right Move For You?

Sometimes the reason you are behind has nothing to do with poor planning. Divorce, serious illness, the death of a spouse or partner, a family crisis. If circumstances genuinely outside your control caused you to fall behind on your tax obligations, you may qualify for taxpayer relief.

Taxpayer relief allows CRA to waive or cancel penalties and interest in situations where it would be unfair to apply them. It is not automatic and you do need to apply, but it exists for exactly these situations.

Learn More >> Taxpayer Relief 

If your net income tax owing is more than $3,000 in the current year and it was more than $3,000 in either of the two previous years, CRA will expect you to pay quarterly tax installments going forward.

Installments are not a punishment. They are CRA's way of having you pay your taxes as you earn rather than in one lump sum at filing time. If you are consistently surprised by a large tax bill at year end, installments might actually help you manage your cash flow better.

Learn More >> Tax Installments

f you are like most of the home-based business owners I worked with, you are already asking yourself this question. Good. That instinct is exactly right.

Two habits will protect you going forward.

1. Open separate savings accounts for your GST/HST collected and your payroll withholdings. Both are trust funds but they work differently and that distinction matters.
   
   GST/HST is money your clients paid you on top of your invoice. It lands in your operating account and it immediately starts to feel like your money. It is not. You collected it on behalf of the government and you are holding it until remittance time. Move it to a separate account the moment it comes in and do not touch it.
   
   Payroll withholdings work differently. You are not collecting extra money from anyone. You are withholding the employee portion from their gross pay before it ever reaches them, and then you as the employer owe additional payroll taxes on top of that. After every single payroll run, transfer the full amount of those withholdings plus your employer portion out of your operating account immediately. This is how you clearly mark that money as unavailable for general operating expenses. If you leave it sitting in your operating account it will get spent. It always does.
   
   Both situations end the same way if you ignore them. CRA treats trust fund failures seriously and the consequences escalate quickly.
2. Every time you take a draw from your business, set aside a minimum of 15% for income tax and CPP. Put it in a separate account and do not touch it. Your tax bill at filing time should never be a surprise if you are doing this consistently.

I walk through the simplest way to set all of this up with a cash simple management system, which shows you exactly how to structure your accounts so the right money is always in the right place.

Learn More About A Quick Win >> Put Your Cash On Auto Pilot

This year, decide that you are going to operate a tax-compliant Canadian business.

That might sound like a heavy commitment, but it is really just a mindset shift. When compliance becomes part of your identity as a business owner, it stops feeling like a burden and starts feeling like just another thing you do, like invoicing or answering email.

Some small business owners close for a half day each week to take care of their back office and compliance obligations. Old school, yes. Effective, absolutely. Pick the slowest half day of your week and make it your paperwork time. Does anyone else remember when small businesses were closed Sundays, Mondays, and Wednesday afternoons? There was a reason for that. Work-life balance comes to mind.

Give yourself the gift of less stress. Get your ducks in a row, stay on top of your filings, and make partial payments in good faith when you need to. CRA is not the enemy when you are playing by the rules.

This explainer is one of three covering tax compliance and filing for Canadian solopreneurs.

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I developed this site's content as a reference guide (I use it myself) based on my professional experience. While I strive for accuracy and completeness, this information is general in nature and should not be considered professional advice. I cannot be held liable for errors or omissions. Please consult qualified professional advisors before acting on any information found here. Review my website's Terms of Use and Privacy Policy before relying on any information. Note: This website (bookkeeping-essentials.ca) is NOT associated with Bookkeeping Essentials Ltd. operating in Bonnyville, Alberta.