CRA Debt Relief in Canada

Why CRA debt is different from other debt

CRA debt is unlike anything else you owe. Most creditors need a court order before they can touch your wages or your bank account. The Canada Revenue Agency does not.

Under the Income Tax Act, the CRA can garnish your wages, freeze your bank accounts, seize your tax refunds, and register a lien on your property, all without going to court first. That is what catches people off guard. You go from receiving a notice of assessment to having your pay cheque redirected in a matter of weeks.

The CRA also charges compound daily interest on unpaid tax. As of Q1 2026, the prescribed rate on overdue taxes is 7%.

Sources: Canada Revenue Agency – Debt collection at the CRA and Canada Revenue Agency – Prescribed interest rates, Q1 2026

That interest alone can turn a manageable balance into something much bigger if you wait too long.

Penalties for late filing and unpaid tax

The CRA penalty system is designed to get worse the longer you leave it.

Under section 162(1) of the Income Tax Act, the late-filing penalty is 5% of your unpaid tax, plus 1% for each full month the return stays unfiled, up to 12 months. The maximum first-time penalty is 17% of the balance owing.

Source: Income Tax Act, s. 162(1)

If you have been penalized for late filing in any of the three previous tax years and the CRA has issued a demand to file, the penalty doubles. Under section 162(2), it rises to 10% plus 2% per month, up to 20 months. That is a maximum of 50% of your unpaid tax added as a penalty alone.

On top of penalties, the CRA charges compound daily interest on both the tax owed and the penalties themselves. Filing on time, even if you can’t pay, avoids the late-filing penalty entirely.

CRA debt relief options

The right option depends on how much you owe, what you can afford, and whether the CRA has already started collection action.

Payment arrangement with the CRA

If you can pay the full amount but need time, the CRA allows you to set up a payment arrangement. You can do this online through My Account or by calling 1-866-256-1147 for personal income tax debt. The CRA will ask about your income, expenses, and assets to determine what you can afford.

Source: Canada Revenue Agency – Arrange to pay your debt over time

A payment arrangement doesn’t reduce what you owe. Interest continues to accrue on the outstanding balance for the full repayment period. The CRA won’t agree to any arrangement unless all outstanding tax returns are filed first.

Taxpayer relief (fairness application)

Under section 220(3.1) of the Income Tax Act, the CRA has discretion to cancel or waive penalties and interest. This is commonly called a taxpayer relief or fairness application. It doesn’t reduce the tax itself. It only reduces the penalties and interest added on top.

Source: Canada Revenue Agency – Cancel or waive penalties and interest

To qualify, you need to show that extraordinary circumstances prevented you from meeting your tax obligations. The CRA considers serious illness, natural disasters, loss of employment, CRA processing errors, and situations where paying the interest would make it difficult to afford basic necessities.

You submit your request through My Account or by mailing Form RC4288 with supporting documentation. As of early 2026, processing takes up to nine months for most cases.

Consumer proposal

A consumer proposal is the only way to settle CRA debt for less than the full amount owed. It’s a legal process under the Bankruptcy and Insolvency Act, filed through a Licensed Insolvency Trustee. Because it is federal law, it binds the CRA just like any other creditor.

In a consumer proposal, you make an offer to repay a portion of your total debt, including tax debt, credit cards, and other unsecured debts. The CRA votes alongside your other creditors. If creditors accept the proposal, interest stops accruing, and the CRA can’t take collection action against you.

The CRA requires all outstanding tax returns to be filed before it will vote on a proposal. Most proposals include repayment over up to five years.

Bankruptcy

If you can’t afford any meaningful repayment, bankruptcy eliminates CRA tax debt.

Like a consumer proposal, it’s filed through a Licensed Insolvency Trustee under the Bankruptcy and Insolvency Act. Once you file, the CRA must stop all collection actions.

Bankruptcy has more serious consequences than a consumer proposal. You surrender non-exempt assets, and it stays on your credit report for six to seven years after discharge. If your personal income tax debt is $200,000 or more and that debt represents 75% or more of your total unsecured proven claims, a court hearing is required before discharge.

Source: Bankruptcy and Insolvency Act, s. 172.1(1)

Bankruptcy is a last resort, but for some people it’s the only way to stop the interest and start over.

Comparing your CRA debt relief options

Option	Reduces tax owed	Stops interest	Stops collection	Timeline
Payment arrangement	No	No	Yes, while in compliance	Up to 12 months typically
Taxpayer relief application	No (penalties and interest only)	Partially	No	Up to 9 months to process
Consumer proposal	Yes	Yes	Yes, immediately on filing	Up to 5 years
Bankruptcy	Yes (discharged)	Yes	Yes, immediately on filing	9 to 21 months

How long can the CRA collect tax debt?

The CRA has a 10-year limitation period to collect income tax debt, starting from the date of assessment. Under section 222(3) of the Income Tax Act, once that period expires, the CRA cannot commence or continue collection action.

Source: Canada Revenue Agency – How long a debt can be collected

The catch is that the clock resets every time the CRA takes a collection action or you acknowledge the debt.

Sending a demand letter, issuing a garnishment, applying a refund to your balance, or even you making a partial payment restarts the 10-year period. If the CRA is actively pursuing you, the limitation period rarely runs out.

For GST/HST debt, the limitation period is also 10 years, under section 313(2.1) of the Excise Tax Act. The same reset rules apply.

Source: Excise Tax Act, s. 313(2.1)

Protecting yourself from CRA scams

The CRA will never ask for your personal or banking information by phone, text, or email. They will never demand immediate payment by gift card, cryptocurrency or wire transfer. They will never threaten you with arrest over the phone.

Source: Canada Revenue Agency – Verify CRA contact

If you receive a call or message claiming to be from the CRA and you’re unsure, hang up and call the CRA directly at 1-800-959-8281 to verify. Scam calls targeting people with tax debt are common because the fraudsters know you are already worried.

Frequently asked questions

Can the CRA forgive tax debt?

The CRA doesn’t voluntarily forgive tax debt. The only way to pay less than the full amount is through a consumer proposal or bankruptcy, both of which are filed with a Licensed Insolvency Trustee.

The CRA can waive penalties and interest through a taxpayer relief application, but the original tax balance remains.

Can CRA garnish my wages without warning?

Yes. The CRA can issue a requirement to pay to your employer under section 224(1) of the Income Tax Act without obtaining a court order. The CRA can garnish up to 50% of net employment income, or up to 100% of contract and self-employment income.

Source: Canada Revenue Agency – How to process a garnishment

Filing a consumer proposal or bankruptcy stops a CRA garnishment immediately.

What happens if I ignore CRA tax debt?

The balance grows. Compound daily interest at 7% accumulates on both the tax and any penalties.

Source: Canada Revenue Agency – Prescribed interest rates, Q1 2026

The CRA escalates collection through demand letters, followed by wage garnishments, bank account freezes, and property liens. Ignoring it makes every option harder and more expensive.

Do I need to file all my tax returns before getting debt relief?

Yes, for most options. The CRA won’t consider a payment arrangement or vote on a consumer proposal until all outstanding returns are filed. Filing late is always better than not filing at all, because it stops additional late-filing penalties from accumulating.

Can I include CRA debt in a consumer proposal with other debts?

Yes. The CRA is treated as a regular unsecured creditor in a consumer proposal. You can include tax debt alongside credit card balances, lines of credit, and other unsecured debts in one proposal. The CRA votes with the other creditors on whether to accept.

How long does CRA tax debt stay on my record?

CRA debt isn’t reported to credit bureaus the way credit card debt is. However, a consumer proposal stays on your credit report for three years after completion, and a bankruptcy for six to seven years after discharge. A CRA lien registered against your property remains until the debt is resolved.

Is there a statute of limitations on CRA tax debt?

The CRA has 10 years to collect income tax debt from the date of assessment. The limitation period resets if the CRA takes any collection action or you acknowledge the debt.

For GST/HST debt, the limitation period is also 10 years under the Excise Tax Act.

Source: Excise Tax Act, s. 313(2.1)

If no action is taken during the full period, the CRA loses the legal right to collect.

Should I borrow money to pay off CRA tax debt?

Be careful with this. The CRA charges 7% compound daily interest, which is lower than most credit cards and personal loans.

Source: Canada Revenue Agency – Prescribed interest rates, Q1 2026

Borrowing at a higher interest rate to pay off a lower one creates a worse problem. If you can’t afford to pay the CRA directly, speak to a Licensed Insolvency Trustee before taking on new debt.

Talk to a Licensed Insolvency Trustee

If you owe money to the CRA and you’re not sure which option fits your situation, a Licensed Insolvency Trustee can walk you through it. The initial consultation is free and confidential.