Does having money in the CRA affect my credit rating?
With the tax season over and the summer moving in, it means for most people to get comfortable and spend some money before winter comes back. For others, it means buckling up and working hard to save as much as possible and getting ready for the next taxes. If you are a taxpayer, you should know that not paying your taxes could significantly negatively affect your financial life.
So what happens to your credit history, your credit history and your credit rating when you do not pay your taxes? Does the Canada Revenue Agency even report your unpaid taxes to the credit bureaus in Canada? And, if they do, what kind of impact would that have on your financial health afterwards? In the article below, we will talk a bit about the tax collection process in Canada and what would happen if you forget or avoid filing your tax return.
What affects my credit rating?
Before discussing how not to pay your taxes affects your credit rating, it is good to understand how it is calculated. While this is not the only factor that financial institutions, lenders, and other organizations consider when considering you for credit, loans, and other financial services, credit rating is an important part of your financial stability. Strictly speaking, there are 5 main factors that affect the health of your rating.
Your payment history – 35%
A report showing when you used credit is the largest part of your credit rating. This means that all bill payments you have made in the last six years are recorded whether these payments were made on time or in full, in part or late or simply missed. These bills can relate to any of your credit products, such as your credit cards, car payments, installment loan payments, your mortgage etc. If you are late, short or miss a payment, your credit rating will decrease. If you make payments on time in full, your rating will increase.
Use – 30%
The second most important part of your credit rating is the use you make of your credit against your available credit. For example, if you have charged a lot to your credit cards, if you approach your credit limit or increase it each time, it will be very difficult to improve your credit rating. But once you pay your bills, your bill should go up.
Your credit history – 15%
The way you use your credit products is important as well as how long you have used them. For example, if you have a credit card that you have been using responsibly for a number of years, this is good for your credit rating. So, if you have a number of credit cards, but consider canceling one or more of them to improve your finances, make sure you cancel the card you had for the shortest period of time, and to keep that one you’ve had for the longest time.
Variety of credit products – 10%
Just as a credit card that you use responsibly can be an asset, having a variety of credit products that you have used wisely can be good for your credit rating. If you have a credit card, mortgage and car loan, and have made all your payments on time and in full, your credit score will be affected positively.
Credit Checks Made by Other Organizations – 10%
When a bank or lender verifies your credit file as a result of a credit application, it is a “primary demand”. These main requests will result in a slight decrease in your credit rating and will appear in your file for 3-6 years. This means that if you submit too many credit or loan requests in a short period of time, your credit rating could drop significantly. Multiple principal claims can also make lenders suspicious about your financial stability because too many credit applications are not financially responsible.
On the other hand, secondary checks do not affect your credit rating. These checks are when you give permission to a potential employer when applying for a job to check your information, or when a credit card company wants to send you promotional offers. Moreover, when you ask yourself for a copy of your credit report either. These checks are secondary. They have no effect on your credit rating.
Who reports to Canada’s credit bureaus?
Canada has two major credit bureaus, Equifax and TransUnion. In general, lenders and creditors report your credit activities to one of these offices. This includes credit card companies that report your credit card, lenders who report your mortgage payments (mortgage lenders do not all report to a credit bureau), lines of credit, car payments, etc. . and missed payments, short payments, late payments, withdrawals and other transactions must also be reported and then compiled into a credit report.
Does the CRA report to Canada’s credit bureaus?
Will the unpaid taxes affect my credit rating?
Yes ! As mentioned above, filing your tax returns late or owing some money to the CRA will not affect your credit report, assuming you have a repayment plan with them. On the other hand, having a large amount of money can certainly ruin your credit when your case goes to court and your tax debt is made public. In fact, if your debt is too large, you may even have to file a consumer proposal or bankruptcy, which, in turn, will damage your credit score significantly up to 7 years.
How can I prevent my credit rating from being damaged by my unpaid taxes?
Since a low credit rating can not only affect your financial health but also your personal life, it’s best to make sure your unpaid taxes do not have a big impact. After all, the majority of lenders will not want to lend to a potential borrower with a long history of non-payment of debt, financial instability and bad credit. If you owe taxes, here are some things you should do:
Contact the CRA immediately and develop a repayment plan
If you owe a lot of money, it is likely that the CRA has already contacted you and warned of the consequences of not paying your taxes. If you have not done so already, it is very important to inform them immediately and start developing a payment plan as soon as possible. If you can prove that you do not have enough funds to pay for them in full, you can negotiate a multi-year plan, which you will have to comply with until your debt is fully repaid. The longer you wait, the bigger your debt will be and the worse the consequences will be.
Manage your finances properly by saving and spending responsibly
According to financial professionals, it is a good idea to have a separate savings account for tax purposes. If you have a regular job that provides a T4, your taxes should be automatically extracted from your biweekly paychecks. If, for any reason, you still owe money to the CRA, it is good to have a fund to cover your annual payments, so you do not have to withdraw money from your checking account. Then, eliminate or reduce as much as possible unnecessary expenses, to save as much as possible.
Find out about the taxpayer relief provisions
If your tax situation meets certain parameters, the CRA may submit your case to the Minister of National Revenue. If your case is approved, my Minister can offer relief by waiving tax penalties and interest charges, canceling penalties, and so on. Check the CRA’s website for more information and to see if your case would qualify for a relief provision.
Consider provisions on financial hardship
If your tax debt situation is out of control and you are worried that you will not be able to afford basic necessities because of all your money to pay off your debt, do not worry. Again, if you go to the CRA and explain your situation, the Canadian government will ensure that you are not in a precarious financial situation and that you have enough money to support yourself.
Either of these options, while not easy or fast, are far better than bankruptcy. Since your credit rating is a valuable tool for your financial future, it is best to take care of it.
Paying taxes is the best way to maintain your financial future
Nobody likes to pay taxes. Most people think of tax filing as a chore, year after year. However, it is important for you to know that you pay these taxes for you and our economy. Being up to date and reporting taxes is not only a way to remain financially stable, but it also helps the Canadian government fund various programs such as education, health care, employment insurance, and so on. A solid financial future is to contribute from you.