November 2008—Did you know that making a payment towards your tax arrears may actually accelerate the growth of your debt?

By Alan Baggett

This is the fifth in a series of tax articles on the Canadian Income Tax System

     It’s true.

     Consider the tax debt of this fictional Canadian ‘X’.

2003 Income Tax Arrears                 $1000.00

2003 Penalty and Interest                   $350.00

2004 Income Tax Arrears                   $500.00

2004 Penalty and Interest                   $150.00

 

 

Total Tax Arrears                   $2000.00

Arrears Interest                        $500.00

Total Arrears                          $2500.00

 

     Due to hardship X has not made a recent payment. $500 in Arrears Interest has accrued on the $2000 tax arrears for a total debt of $2500.

     Arrears interest is charged ONLY on the Total Tax Arrears. Important to note.

So, currently, X is paying interest on $2000 even though $2500 is owing.

     Let us assume that X just made a payment of $100.

     The tax liability on their account will now look like this:

2003 Income Tax Arrears             $900.00

 

2003 Penalty and Interest                   $687.50

2004 Income Tax Arrears                   $500.00

2004 Penalty and Interest                   $312.50

Total Tax Arrears                             $2400.00

Arrears Interest                                      $0.00

Total Arrears                                    $2400.00

     X now has Total Arrears of $2400. $2500 - $100 = $2400. The $100 payment has been credited to the oldest debt and the 2003 Income Tax Arrears has been reduced from $1000 to $900 dollars. The previous Arrears Interest figure of $500 has been reallocated between the 2003 and 2004 penalty and interest totals.

     But X’s Total Tax Arrears are now $2400 instead of the previous total of $2000.

     So interest is now charged on $2400 instead of $2000.

     Meaning that X will pay an increased amount of interest because they made a $100 payment. Is this fair?

     Maybe to Canadians it’s not fair but politicians and Revenue Canadians certainly have no qualms about it.

If you are fearful of CRA, of being audited or looking for inside knowledge on the operation of this powerful government department the details can likely be found in this unique tax help resource written by a former CRA employee.

     The Tax Collector’s Bible Table of Contents can be found at

http://www.lulu.com/content/2132527 or contact taxbible@gmail.com for further details. The book is published in CD format. Please ensure that you run MS Word 97 (or later versions) as this program was used to author the Tax Collector’s Bible and so is best for reading. To purchase this CD send $24 to Alan Baggett, 1165 Carol St., Burlington, ON, L7S 2A2