If you owe the CRA and cannot pay in full, the worst move is to do nothing. File your return on time even if you cannot pay, then deal with the balance. The CRA has strong collection powers, and interest runs daily, but it also offers payment arrangements, a relief program for penalties and interest, and a voluntary disclosure route for past mistakes. Acting early keeps you in control of the conversation.
File first, even if you cannot pay
Filing and paying are two separate obligations. The late-filing penalty is charged on top of interest, so filing on time, or as soon as possible, limits the damage even when the money is not there. A filed return with an unpaid balance is a far better position than an unfiled one. Get the return in, then turn to the balance.
What the CRA can do
The CRA's collection powers are broad and, for most actions, do not need a court order:
- Charge daily compound interest at the prescribed rate plus 4%. For the first and second quarters of 2026 the prescribed rate is 3%, making the overdue-tax rate 7%. The rate is reset every quarter, so check the current figure on canada.ca.
- Add late-filing and other penalties.
- Issue a requirement to pay to someone who owes you money, such as a customer holding your invoice, effectively garnishing your receivables.
- Garnish wages, freeze or seize a bank account, and register a lien on property that shows up on title.
- Keep federal refunds and credits and apply them to the debt.
One point that catches trades out: GST/HST you collected from clients is trust money. The CRA treats unremitted GST/HST more harshly than ordinary income tax debt, and it can survive bankruptcy in many cases. Do not dip into the tax you collected to cover cash flow.
Payment arrangements
The CRA's usual first response to someone who cannot pay is a payment arrangement: an agreement to clear the full balance, including interest and penalties, in instalments. The CRA generally wants:
- Full disclosure of your income, expenses and assets.
- A realistic, and preferably short, repayment schedule.
- All current and future returns filed and obligations met on time.
Interest keeps accruing during the arrangement, so pay as much up front as you can and clear it as fast as you can manage. You can propose an arrangement by phone or through My Account.
Taxpayer relief: getting penalties and interest waived
Under the taxpayer relief provisions, the CRA can cancel or waive penalties and interest where:
- Circumstances beyond your control caused the problem (a serious illness, a death in the family, a natural disaster or fire).
- A CRA error or delay caused it.
- Paying would cause genuine financial hardship that stops you meeting basic living costs.
You apply on Form RC4288, Request for Taxpayer Relief. Relief can only reach back to the current year plus the previous ten calendar years. It waives penalties and interest, not the tax itself.
The Voluntary Disclosures Program
If you have under-reported income or not filed in past years, the Voluntary Disclosures Program (VDP) lets you come forward before the CRA contacts you. A qualifying disclosure can mean relief from gross-negligence penalties and partial interest relief, and it avoids criminal prosecution. The window closes the moment the CRA makes contact, whether by audit letter or phone, so the time to use it is before you are caught, not after.
When the debt cannot be repaid
If the balance is genuinely unmanageable, a licensed insolvency trustee can set up a consumer proposal, which settles unsecured debts (income tax included) for a portion of the total and stops collections on filing, or, in the worst case, bankruptcy. Note again that GST/HST trust amounts are treated differently and may not be wiped out. Get professional advice before going down either road.
Common mistakes
- Not filing because you cannot pay. The late-filing penalty stacks on top of interest. Always file on time.
- Spending the GST/HST you collected. It is trust money. The CRA pursues it hard, and it can outlast bankruptcy.
- Ignoring CRA letters. Silence invites garnishment and bank freezes. A phone call almost always opens a better path.
- Waiting for the audit before disclosing. The VDP only works before the CRA contacts you.
- Forgetting interest keeps running. It compounds daily through any arrangement, so front-load your payments.
Know someone who needs this?
Keep reading
Was this guide useful?
Didn't find what you were looking for?
Spotted something wrong or out of date? Email us at hello@kilnguides.co.uk.
In crisis? 988 Suicide Crisis Helpline (call or text 988) ·