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How to resolve a surprised tax bill

on Tue, 09/06/2011 - 11:25

I finally decided I would put clients' cases on my blog, so that you (readers, if there is any) will have an idea how I work with my clients.

So... here is the first case:

Slightly after the new year, I received a call from a clinet who had been working with me for a good 2, 3 years, that he got audited by the CRA, and that he got a surprised tax bill of over $10K. He told me he immediately withdrew $5k from his RRSP and he was looking into getting a personal loan from a bank so that he can pay off the tax man immediately.

This is a very normal move to a lot of people, is that, they will use any resources they have to pay the CRA (that includes getting a new loan or line of credit from a bank or even worse, getting cash advance from credit cards). I am not saying you don't pay your tax, but look, CRA is not as scary as people think. (If you are lucky and you get a nice officer to handle your case) Chances are you will be able to negoitate with them and set up a payment plan on your outstanding tax.

By withdrawing his RRSP, he is facing extra tax due by the end of the year (which is NOT what he wants either). So I suggested him to take a RRSP loan (much cheaper than a personal loan or a line credit), so that he can make up the amount he withdrew to aviod more tax due by the emd of the year. We did that.

When we met again, we went through his expenses again (we had a budget on him so that he had been contributing RRSP as well as TFSA with me bi-weekly). At the time, he was:
- contributing RRSP and TFSA;
- had a RRSP loan which would be finishing within the year
- in placed a life insurance policy on his son for future education expenses need

We decided to take what he had at the time in his TFSA and pay another portion of his tax due.

I suggested him:
1. talk to OSAP (which he is still repaying), to see if he can get a break from them;
2. re-route his RRSP contribution to his TFSA, so that he can have his money flexible when he needs it;
3. continue his TFSA contribution while he talks to CRA to work out a payment plan

Since we are making another payment (from his TFSA) while he is netigoating with the CRA, they gave him some time to work things around. We continued to buy time from talking to different people (i.e CRA and OSAP) and we were able to pay off the whole outstanding amount in about 7 months’ time (of course, we still have the RRSP loan to pay off that we just took out) but he is so much relaxed after he got the CRA off his back.

A lot of times, when you get into a sudden change, a surprised expense, you might think there is no way to get around it. Try talk to an advisor and explore different options, you might be amazed how things can be changed compare to the way they were presented to you :)

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