Should I Borrow to Pay Taxes to CRA?

Should I Borrow to Pay Taxes to CRA?

You may find yourself owing money to the Canada Revenue Agency, or CRA, after completing your annual tax return or because the CRA reassessed your tax return and perhaps denied some deductions. While CRA will work out a payment plan with you when you don’t have the funds to make a full payment on your outstanding CRA amount, their first request may be that you consider using a loan to pay back taxes. But is it a good idea to borrow money to pay taxes?

What Happens if You Fail to Pay the CRA on Time?


Interest charges are common with late payments in any industry, and the Canada Revenue Agency is no exception. The CRA charges compound daily interest on any tax balance owing, including penalties.

CRA sets a new prescribed interest rate every three months. As of June 2020, the interest rate on overdue taxes, CPP or EI premiums, or HST or GST remittances was 6%.


On top of the interest charged on a late payment, there are also standard late-filing fines applied by the CRA, and these can be weighty, as well. File your return after the due date, and you can expect a 5% penalty on any amount you owed on that return. This amount grows by 1% for every month your return is late, up to a maximum of 12 months.

Furthermore, for those who have submitted previous filings late and paid similar late fees, the fine can double up to 10% plus 2% of your balance for each full month, now up to 20 months at the maximum.

It’s not uncommon to meet people with chronic late filings sitting on interest and penalties higher than the initial unpaid tax after failing to file their tax returns or owing money for several years.

So step number one, even if you think you owe money, is to file your returns to limit your obligation significantly.

Should You Pay Off Taxes with a Loan or Credit Card?

The objective of borrowing money to pay off your CRA debt is to avoid ongoing CRA interest costs and possible CRA collection actions.

Borrowing money to pay back taxes can make sense if:

  • You can borrow enough to cover the full amount you owe to the CRA.
  • The interest rate is less than the prescribed rate charged by CRA, which means something in the range of 5-6%. You want to pay less interest, not more on your tax loan.
  • You want to avoid the risk that the CRA will place a lien on your home, garnishee your wages, or freeze your bank account or other assets.

Having said all that, taking out a tax loan is not a good idea for everyone. It’s crucial to borrow only an amount you’ll be able to pay back, or you’re just swapping one problem for another.

Ask your loan provider to outline any additional costs or origination fees. If you think you can pay off the loan early, ensure there are no hidden fees or penalties for doing so.

How To Choose The Right Tax Loan

So you’ve decided to take out a loan to pay your taxes. Before starting, you want to consider all the normal requirements for choosing the right type of loan.

  • Consider the maximum credit limit you may qualify for along with the affordability of the monthly payments.
  • Understand that your current credit score and income will affect the type of loan you are eligible for as well as the interest rate you will be charged.
  • Determine if you should apply for a secured or unsecured loan. A second mortgage or Home Equity Line of Credit might come with a lower interest rate but there are risks of consolidating with a secured loan.
  • Don’t apply too often as multiple applications can hurt your credit score.

Avoid high-interest personal loans that charge between 35% and 59% to borrowers with a below-average credit score or who otherwise will not qualify with a traditional lender.

Alternatives to Loans to Pay Off Tax Debt: Canada

Before applying for a new loan, consider these alternatives to dealing with outstanding tax debts.

Installment Payments or Saving

If you are a self-employed person, you may not have tax deductions at source. When it’s time to file taxes, you could be facing a bill of 25% to 30% of our net income. If you’ve earned business or non-taxed income in the past, CRA will estimate what your installments should be based on your net tax owing from the previous year, and any CPP or EI premiums payable on self-employed income.

If this is your first year earning a small business income, or you earn other income which you will have to pay taxes on in the future, make your own installment plan to set aside monies monthly into a separate bank account to cover your future tax bill. This will help you avoid the need to borrow when you file.

Cashing in Investments

It may be possible to sell or cash in investments and use the funds to pay off your tax obligation. Beware however that this can come with a higher future tax cost. Withdrawals from an RRSP before retirement are subject to a withholding tax of 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000 and 30% for amounts above $15,000.  If the withholding tax rate is less than your personal tax rate, you may be facing another tax bill next year.

Can I pay taxes with my credit card in Canada?

The simple answer is yes, it is possible to pay your CRA taxes by credit card, PayPal or e-Transfer but you must do so through a third-party provider. There will be an additional fee to process your payment.

Borrowing by way of credit cards however is expensive. Most credit card interest rates are in the range of 19%. Only do this if you can pay off your credit card balance quickly.

CRA Debt Repayment Plan

CRA offers tax debt repayment plans, but only in cases where the person proves they can’t pay or borrow. Also, even if you are approved, they can stop the payment plan at any point if they think you can pay or borrow money to pay taxes.

Tax Relief

CRA is also willing to make provisions for certain people to receive relief from penalties and interest charges. People who need relief from their underlying tax obligation must file a consumer proposal or bankruptcy through a Licensed Insolvency Trustee.

In Conclusion

Ultimately, nobody wants to be in the position of owing the CRA money on late tax returns. But sometimes there’s no option but to make a late payment. Life gets in the way and there aren’t many options to remit or extend your payments. More important than the dozens of different options for paying off your debt is one simple guiding factor: paying the CRA as quickly as possible.

Looking for more great insights into your debt payment process? Just want to talk to someone who knows what they’re talking about and has the experience to help you climb out of debt? Check out some of our other expert blog content, or get in touch with us at 1-866-747-0660, today, to find out more!

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  4. The Benefits of Making Small Micropayments Towards Debt
  5. Should I Borrow To Pay Off My Consumer Proposal Early?

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