Self-Employed? Feeling a Pinch During Income Tax Season?
For individuals carrying substantial consumer debt, income tax season can be a blessing or a nightmare. Of course, it all depends on whether you are expecting a refund or a bill.
I am self employed, and I experienced financial distress in 2009 and eventually filed a Consumer Proposal. Looking back, there were warning signs that I was in trouble, and many of them occurred around tax time.
Self-employed persons often pay income tax once a year, at the time of filing. For us, this can be a time to take stock – particularly if we worry we can’t afford to pay the income tax we owe!
Self-employed businesspeople often rack up large debts with Canada Revenue Agency (CRA).
CRA and Income Tax Debt
If you ignore CRA, fail to file, or fail to pay what you owe and never contact them to discuss the cause, you my feel the brunt of their displeasure in the form of wage garnishments or depleted/frozen bank accounts.
CRA is the only creditor that does not need to go to court to appropriate funds in this way.
Although some feel that CRA is heartless in its dealings, my experience with CRA has been fairly positive. It helps if you are honest and realistic. Can’t pay your tax bill all at once? Contact CRA and you may be allowed to make a series of monthly payments. Fulfill your promise, and CRA will be happy.
However, sometimes circumstances can make even this type of arrangement impossible. Self-employed businesspeople may have creditors other than CRA, who are not as patient. And eventually, a debtor may owe more than he or she can handle.
Signs Your Financial Stress Is Building
Because income tax can be one of the largest bills of the year, tax time is when we get a good picture of whether we are keeping up or losing ground. New business owners may be shocked to find that they owe several thousand dollars to CRA at tax time, despite business deductions. If you are in this situation, here are some choices:
- Pay CRA out of your savings
- Pay CRA with a credit card or bank loan
- Don’t pay CRA, hoping you’ll be able to send them the full amount “soon” (before you hear from them)
- Don’t pay CRA, but contact them to see if you can arrange a series of monthly payments
Over the few years before I filed my Consumer Proposal, I did all of these! So, from experience, I know that only answer #1 is a sign of financial well-being. If you need to use any of the other three options, you may be under a dangerous amount of financial stress.
What to do? Consider Consulting with a Trustee
If it’s tax time and you are realizing that you have no funds to pay what you will owe, it’s time to get thinking. Is this a temporary condition? If you’ve had these problems for a few years running, it’s not.
If CRA and other creditors’ bills are using up most of your available funds, consider making a free first appointment (it’s confidential and no-obligation) and sitting down with a Licensed Insolvency Trustee.
You can outline your situation. The Trustee will have valuable suggestions and insights, and won’t make you feel embarrassed.
If Consumer Proposal or even Bankruptcy is a suitable solution, the Trustee will tell you how it will work and what to expect. At that point, you can make an informed choice and chart the road ahead.
I’m glad I saw a Trustee when I did. My Consumer Proposal allowed me to start fresh, and keep my small business. My only regret is that I did not see a Trustee sooner, and save myself additional months of stress.