How to Repay Back Taxes, Pay the Bills & Get Your Finances Back on Track
Q: I cashed out some of my RRSPs last year to pay down my credit cards. I thought the bank held back enough so that I wouldn’t owe extra income tax, however, I just got my assessment back and I do owe. I’ve been just managing to pay my bills, so with having this extra income tax debt now, I’m not sure how I’m going to be able to keep up. What do you suggest?
A: At first glance, it looks like the challenge you have is your tax bill. However, based on experience, I would suggest that there is more to it than that.
Get Your Finances Back on Track with Two Step
It’s human nature to become overwhelmed when one problem piles on top of another. Many times, the situation feels out of control and we lose sight of how to get back on track. I would strongly encourage you to look at your situation with two things in mind.
1. Setup a an Affordable Tax Payment Plan
Start by dealing with the most immediate problem; your income tax bill. CRA is an organization that requires payment or a payment plan upon assessment. The consequences of ignoring your income tax bill are serious; you might face additional interest charges, late penalties, the seizure of money in your bank accounts, not receiving credit or refunds in future years, a lien against your home or a wage garnishment. Even if you’re not able to pay the whole bill right now, speaking with an agent at CRA and establishing an affordable payment plan is your wisest course of action to deal with this debt.
2. Create a Realistic Debt Repayment Plan
Then, establish a practical plan to deal with your debt. Taking money out of your RRSP is not a sustainable debt reduction strategy. As you are learning, there are immediate consequences for doing that, but it will also leave you short when you retire and need the savings to pay for living costs. To deal with your debt, I would strongly recommend that you look at your whole financial situation sooner than later. Your budget will be extremely important, as will prioritizing your debts in order of how much you owe and to whom. Next, consider all of your debt payment options carefully, including decreasing your expenses, increasing your income, spending less on discretionary items as well as alternatives to making your contractual payments.
Make a Plan to Suit Your Situation
Your budget may be such that you’re not able to pay all of your debts in full right now. However, with an objective look at your finances, you will be able to create a plan that suits your current circumstances and also lets you get ahead.
By having a balanced budget and a plan to eliminate your debts and increase your savings, rather than crisis managing your affairs, you can look forward to making decisions with positive long-term financial benefits.