Personal loans to pay off tax debt in Canada

We all know that time of year — April 30 — when it’s time to gather the necessary documents and file your taxes. Filing your taxes can be an overwhelming process and matters can be made worse when you realize you owe money or you’re audited a few months later and owe the government funds.

The Canada Revenue Agency (CRA) can be unforgiving when you owe them back taxes — as are the interest rates and fees associated with late payments. If you don’t have the savings on hand to foot the bill, you could consider using a personal loan. In this guide, we cover personal loans as an option to pay your taxes. Learn how to get one and why it might be right for you.

Can I use a personal loan to pay tax debt?

• Yes, you can. In fact, you can use a personal loan for nearly any legitimate purpose, which includes CRA debt. You can typically borrow between $500 and $35,000 with a personal loan and take between one and seven years to pay it off.

When applying for a personal loan, you’re usually asked what you plan to use your loan for. Your reason is a factor used by the lender when evaluating your application and could affect your approval as well as your loan’s terms and rates. As you can imagine, paying taxes could be considered more responsible than paying for a vacation.

Should I use a personal loan to pay tax debt?

Before you decide to apply for a personal loan to pay your taxes, find out if you’re able to work out a repayment plan with the CRA.

If you decide to apply for a personal loan, ask yourself the following questions to help you decide if it’s the best solution for you:

• How much do I owe the CRA? Personal loans typically come in amounts ranging from $500 to $35,000. If you owe more or less than this, a personal loan might not be able to help you pay your tax bill.
• What’s my credit score? You’ll typically need to have good or excellent credit to qualify for the most competitive loans. If your credit score is below 650, you might have a difficult time qualifying for a personal loan.
• Can I afford the monthly repayments? Taking out a personal loan you can’t afford to repay can seriously damage your credit and throw you into a spiral of debt.

Compare personal loans you can use to pay your tax debt

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Name	Product	Interest Rate	Loan Amount	Loan Term	Requirements
Loans Canada Personal Loan Loans Canada Personal Loan		5.4% - 46.96%	$300 - $50,000	4 - 60 months	Requirements: min. credit score 300	Go to site View details	Compare	loading Fetching your data...
Spring Financial Personal Loan Spring Financial Personal Loan		9.99% - 46.96%	$500 - $35,000	6 - 60 months	Requirements: min. income $1,800/month, 3+ months employed, min. credit score 500	Go to site View details	Compare	loading Fetching your data...
SkyCap Financial Personal Loan SkyCap Financial Personal Loan		19.99% - 39.99%	$500 - $15,000	9 - 60 months	Requirements: min. income $3,333/month, full time employment/pension, min. credit score 600, no bankruptcy	Go to site View details	Compare	loading Fetching your data...
LoanConnect Personal Loan LoanConnect Personal Loan		6.99% - 46.96%	$100 - $50,000	3 - 120 months	Requirements: min. credit score 300	Go to site View details	Compare	loading Fetching your data...
Mogo Personal Loan Mogo Personal Loan		9.90% - 46.96%	$200 - $35,000	6 - 60 months	Requirements: min. income $13,000/year, min. credit score 500	Go to site View details	Compare	loading Fetching your data...
Fairstone Secured Personal Loan Fairstone Secured Personal Loan		19.99% - 24.49%	$5,000 - $50,000	36 - 120 months	Requirements: must be a homeowner, min. credit score 560	Go to site View details	Compare	loading Fetching your data...

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What happens if I don’t file my taxes on time?

If you owe the CRA taxes and don’t file your return by April 30, you will face the following late charges:

• 5% of the balance owing as late filing penalty
• 1% of the balance owing as an additional penalty for every full month you don’t file (up to a maximum of 12 months)
• Interest charged on the above penalty
• Additional daily interest compounded on the balance owing based on rates dictated by the CRA

As an example, if you file your taxes 12 months late, you’ll face a 17% penalty on the balance owning. This does not include interest on the amount.

In addition, you can face late filing penalties for the previous four years (if applicable), which can increase the 5% balance owing penalty to an astonishing 10%. You will then face additional 2% charges every month you fail to file up to a maximum of 20 months. This ultimately means your late filing penalties can reach a maximum of 50% of the balance you owe.

If you don’t owe any money to the CRA, they will still hold your refund until you file your taxes.

Benefits of using a personal loan

Depending on the lender you choose, you may be able to benefit from the following:

• Loan term. Personal loan terms vary between lenders, however you will usually have between one and seven years to pay back the loan amount.
• Loan amount. Personal loan amounts generally sit between $500 and $35,000. While you may be able to take out more than the amount you need, this is usually a bad idea since you’ll pay interest on the amount borrowed.
• Fees. Depending on the lender, you may be able to get a loan that doesn’t carry any origination, administration or early repayment fees.
• Unemployment protection programs. Some lenders offer you protection or insurance in the event that you lose your job and need to put your repayments on hold.
• Online application. While you can visit a tax preparation company in person and find a reputable lender, there are many trustworthy tax loan lenders online. This can mean a quicker application process. Be sure to read customer reviews and contact the lender if you wish to find out more information.

What to watch out for

Taking on debt isn’t an easy — or fun — choice to make. Here are a few factors you’ll want to be aware of:

• Interest rates. Compare your options to find the best rate you’re eligible for. Your credit score plays a big part in how much you pay in interest. For most lenders, you’ll need a good or excellent credit score to get the best rates. Once you get a loan, you can save on interest by paying it off early.
• Hidden costs. Carefully read the terms and conditions of your loan to check for any unadvertised fees or costs. If you’re unsure of the total cost of the loan — or details of how the lender’s broken them down — don’t be shy about asking for more information.
• Affordability. If you don’t think you can make your loan repayments on time, avoid taking out a loan in the first place. Not only will you find yourself in a vicious cycle of debt, you will also damage your credit score, which can result in difficulties being approved for financing in the future.

Where can I get a loan for tax debt?

You can apply for a personal loan to pay off your taxes from a number of places, including:

• A bank. Banks usually offer loans to customers with good to excellent credit, so if you have a poor or fair credit score, you may have to look elsewhere. Banks usually offer competitive interest rates and favourable loan terms.
• A credit union. Although you’ll need to be a member of the credit union in order to apply for and receive a loan, these financial institutions usually offer competitive interest rates and loan terms.
• An online lender. If you have less than perfect credit or need the loan in a hurry, you may decide to apply for a loan from an online lender. With quick and simple applications, you can usually receive your loan funds within one business day.
• A peer-to-peer marketplace. P2P marketplaces connect lenders and borrowers. You will need to wait until one or more lenders fund your loan in full before you receive it.

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How to get a personal loan to pay tax debt

Getting a personal loan to pay your taxes can be a straightforward process. Once you know exactly how much you owe, you can compare lenders that offer loans of that amount. When you find a lender that you’re interested in, you can start the application process by navigating to their website.

In order to apply for a loan, you will usually need the following information on hand:

• Your full name, address, email address and telephone number.
• Proof of ID, such as your Canadian driver’s licence or passport.
• Details about your employment, income, debts and expenses.
• The amount you’re requesting and the reason for borrowing.

Lenders usually won’t require documentation for the amount you owe the CRA, but it can be a good idea to keep your tax bill handy in case any specific information is requested.

Alternative financing options

• Credit card. If your tax debt is small enough or your credit limit is high enough, you may be able to pay off your debt with a credit card. Keep in mind that credit card interest rates may be higher than those the CRA or personal loan lenders charge. Putting a large cost, such as your tax bill, on your credit card could also negatively affect your credit score by raising your debt-to-income ratio.
• CRA payment arrangement. If you cannot pay your taxes in full, and prove that you can’t afford to with your income and expenses, the CRA will create a payment plan for you. This means you’ll pay the amount back over a specified period of time in small installments. In order to be eligible for this payment arrangement, you’ll likely have to prove you’ve tried to reduce your expenses or borrow money in order to pay the balance owed.
• Secured personal loans. A secured loan uses collateral to keep your interest rate low. If you don’t have a great credit score but have something you can use as collateral, such as a car or equity on your home, then a secured loan may be helpful when you need to pay your taxes.
• Taxpayer relief provisions. This is a rare exception where the CRA will partially or fully waive your tax bill if you’re facing financial hardship or an inability to pay. You’ll need to provide proof in the form of your income, expenses, assets and liabilities in order to be considered. Only granted in very rare cases, you’ll need to prove you have an inability to pay for the basic necessities of life if you were to pay your tax bill back.

Bottom line

Your current financial situation and the amount you owe the CRA will determine the financing option that is best for you. If you decide that a personal loan is right for you, you can review your lending options in order to find the best loan for you. Look for competitive interest rates, favourable loan terms and a trustworthy lender.

Frequently asked questions

• Will my personal loan monthly repayments be fixed?

  They can be. If you prefer fixed monthly repayments, you’ll need to specifically look for a fixed-rate personal loan. If you prefer paying rates based on the state of the market, you can look into variable-rate personal loans.

• Can I make early repayments on my personal loan?

  For most loans, yes. However, your lender may charge a fee for early repayments. Before you make early repayments, make sure you’re aware of any fees.

• Are there fees associated with a CRA installment agreement?

  Yes, however you will only face additional fees if you pay late or don’t pay the full amount owed by the specified date. Installment interest is compounded daily at the prescribed interest rate, which is dictated by the CRA and can change every three months.

  According to the CRA, you will be charged interest if all of the following conditions apply:

  • You’re sent an installment reminder that shows an amount to pay
  • You need to pay the installment payment this year
  • You didn’t make installment payments, or you made payments that were late or you paid less than what you had to pay

• Are personal loans to pay off taxes tax-deductible?

  Usually interest paid on money borrowed to generate an income is tax deductible, so it’s unlikely that you will be able to claim your personal loan as tax deductible since you’re using it to pay your tax bill.