Your guide to tax loans

Need some extra cash to pay your taxes? Whether you've been audited or you owe money after filing, you've got loan options available to you.

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Sometimes, filing your annual tax return can make all the difference to your financial situation, whether for good or bad. While some years you might find yourself getting a refund, other years might leave you seriously in the red.

That’s where the tax loan comes in. If you find yourself getting audited and owing money you don’t have, or simply filing a return only to find out you will owe money that you need to pay, a tax loan can help you out.

Before you jump the gun and take out a tax loan, keep in mind the CRA have repayment schedules for those who notify them of their financial struggles. Learn more about tax loans and CRA repayments in our guide, and learn which might be the best option for you.

What exactly is a tax loan?

While you can take out a regular loan to cover the amount of money you owe for your taxes, there are also special tax loans available. These loans can usually be found through lenders who advertise tax loans. A tax loan is similar to a traditional short term loan that you would take out from a lender. Like other loans, you’ll need to pay interest on the amount you borrow as well as any additional fees tacked on.

Who’s eligible for a tax loan?

Tax loans are available to those who have money owing on their taxes, whether it’s from filing or being audited weeks, months or even years later. You can contact a lender who offers the service and apply with your personal, financial, banking and tax details.

If you really can’t pay your taxes back and you can prove that your income and expenses simply won’t allow it, the Canada Revenue Agency (CRA) does occasionally offer something known as a Taxpayer Relief Provision. This is a rare occurrence however, and you must file a lot of paperwork and meet many requirements in order to have tax relief.

What are Taxpayer Relief Provisions?

Taxpayer Relief Provisions are special cases where the CRA will excuse the amount of tax that you owe. This ultimately helps out taxpayers in emergency situations. Inability to pay or financial hardship qualify for Taxpayer Relief Provisions, however you’ll have to prove that you absolutely cannot afford to repay. In these instances, your tax bill may be waived if your ability to repay your taxes would hinder you from having even basic life necessities, like a home over your head, food in the fridge or money to pay your necessary bills.

What features should I consider when getting a tax loan?

Since there’s a growing number of lenders who offer tax loans, keep the following factors in mind when comparing your options:

  • Loan processing time. Since your owed tax amount will compound daily interest from the government, it’s essential that you get your loan as quickly as possible. Lenders may be able to process your loan in as little as one business day, while others may take longer.
  • Maximum loan amount. The maximum amount you can borrow will depend on the amount you owe for your taxes, as well as your income and your ability to make your repayments.
  • Fees. Tax loan fees tend to be quite high, since you may need to take one out if you aren’t able to pay your outstanding tax bill. If you repay the loan late or rollover your loan, you’ll likely be charged additional fees.
  • 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. Be sure to read customer reviews and contact the lender if you wish to find out more information.

Is there anything to avoid with a tax loan?

You should be wary of a few factors when taking out any type of loan, including a tax loan:

  • If you don’t think you will be able to budget in your loan repayments, you may need to avoid taking out a tax loan in the first place. You could end up in a vicious cycle of debt if you’re unable to make your repayments. Consider a cheaper payment method or contact the CRA for further guidance.
  • Not making your loan repayments on time may negatively affect your credit score. Not all lenders will report you to one of the credit bureaux, however some will and this is at the discretion of the lender.
  • Carefully go over all of the loan’s terms and conditions in order to understand exactly how much your loan will cost you.
  • There are many untrustworthy lenders in the loan space, especially in the online world. Always choose a reputable lender and do some background research on them to make sure they are legitimate.

Alternatives to getting a tax loan

Instead of getting a tax loan, you can opt for one of these financing options instead:

  • CRA payments. Depending on your situation, you can likely work out a repayment schedule with the CRA. Instead of paying interest and fees on a loan, you can instead focus on making your repayments directly back to the government. To be approved for payments, you will usually need to prove that you’ve tried to cut down on your expenses and that you’ve tried to borrow money from elsewhere. Additionally, you’ll have to supply lots of documentation including your income and expenses, assets and any liabilities.
  • A personal loan. If you have a good credit score, it could be worth it to take out a personal loan from your bank or credit union.
  • Short term loan. Payday loans are more risky, however if you only owe a small amount for your taxes and want to pay it off quickly, you can opt for a short term loan. As long as you can afford to make your repayments on time, a payday loan is really only worth the risk if you don’t qualify for any other type of financing.

Bottom line

While a tax loan can be a great way to pay off your tax bill and move on with your life, a cheaper option is to make repayments with the CRA. Not only are they already aware of your financial situation, they will work with you to create a repayment schedule that works for you.

However, if you are denied for CRA repayments or decide they are not right for you, consider taking out tax loan or compare your other financing options.

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