How Home Equity Can Be Used to Payoff CRA Debt
It is not unusual to learn that you owe some money to the Canada Revenue Agency (CRA) after you file your personal tax returns. This is especially true if you have neglected to do them for a year or two. Like any other unexpected expense, you need to tighten up your budget and work even harder to try to find ways to eliminate the debt before you run up interest charges and late payment penalties.
You may find other, more immediate obligations that are more pressing. If this is the case, it is best to stay in touch with CRA and let them know your plan to deal with and ultimately eliminate your debt. They do have some flexibility.
Now and then, there are homeowners whose tax debt is so massive that it can’t actually be readily paid through the ordinary course of life. The end result is a debt that can’t really be negotiated away.
In instances like these, the smallest CRA debt is often around $40,000 and the largest more than $250,000. Regardless of the exact amount, the homeowner also owed money somewhere else – and also had a large amount of credit card and other unsecured debt. In other words, the size of the problem was way beyond the norm.
Unfortunately, this seems to happen more often to self-employed individuals and small business owners. That said, regular folks are not immune to this problem.
Fortunately, if you own a home and have a decent amount of equity in it, a creative mortgage financing option can sometimes help to clean things up- even if the amounts of money that are due are quite substantial, if liens have been placed on your property or if bank accounts have been garnished.
How Can I Use My Home Equity to Pay Back the CRA?
Before we get started, it is essential that you understand that when there is a substantial CRA debt, very few traditional lenders want to refinance a mortgage before the debt is dealt with. When this happens, there are several ways home equity can be used to pay off CRA debt:
Refinance the original mortgage to an alternative lender (also referred to as a “B lender”). Ideally, the new mortgage amount will be enough to clear CRA entirely and cover all fees and other debts.
Borrow money from a private second mortgage lender, pay the debt, then refinance down the road. The length of time you wait to refinance depends on the strength of the file, which lender currently holds your first mortgage and when that mortgage is set to mature. A few “B lenders” have second-position financing options, which may suit this approach.
If you already have a Home Equity Line of Credit (this is also known as a HELOC), and there is sufficient room to pay the tax debt, using it can make a lot of sense. Essentially, all you have to do is write a cheque and be done with it. The interest rate is probably around prime + 0.5%, – that might be as good as it gets in the majority of these situations. This will solve the immediate problem; then you need a plan to reduce your Home Equity Line of Credit balance by saving aggressively and then paying it down. You may ultimately decide it makes sense to refinance and roll the HELOC balance into your mortgage.
Borrow money from a close friend or family member to pay down the debt. After this, it is important to consider at least refinancing your mortgage and repay your benefactor.
When there’s insufficient equity to pay CRA in full, it may be time to reach out and attempt to set up a negotiated settlement. This often involves trustees who will file a consumer proposal on behalf of the debtor.
The right solution will depend on the various circumstances of each situation. It is also important to note that there are some circumstances where homeowners will not be considered to be good candidates for eventual traditional lending no matter how we solve the immediate problem.
This is Often the Case When:
- Their income doesn’t meet the nationwide stress test qualification rules. When this happens, homeowners may have to work with alternative lenders allowing higher debt service ratios
- They’re self-employed with income that is difficult to verify by traditional methods
- Their personal credit history has shut the door to conventional lenders (e.g., multiple insolvencies or recent late mortgage payments)
For Example The Jones’
The CRA tax arrears and other unsecured debt exceed the amount of equity that the Jones’ can extract. Keep in mind, though, if the CRA has already placed a lien on their home, the Jones’ are unlikely to be able to negotiate a discounted settlement with them.
In this scenario, the Jones’ might work with a trustee, who will help them negotiate the terms of a consumer proposal. At that point, all unsecured debts,(the CRA debt included) are packaged together. In this case, the majority of proposals agree to repay a certain amount of money (usually every month) to all creditors over the next five years – with no further interest costs and late payment penalties.
Once the proposal has been accepted by the creditors, it might be possible that a mortgage broker experienced in this sort of lending can arrange a second mortgage to complete a lump-sum payout of the consumer proposal or even refinance directly to an alternative lender to pay the reduced debt amount.
As you can see, when you own your own home, you have options to address the issue of significant CRA tax arrears impacting your power to borrow. Some real estate markets lend themselves to this approach better than others – the more equity you have in your home, the more likely one of these solutions might work.
During the process, it is best to stay in contact with your CRA case officer and explain that you are looking at different ways to raise capital to settle your debt. The process can be painful, but having the right experts on your side will make all the difference.
To find out if you can qualify for a mortgage to pay off your CRA debts, contact us we may have a strategy for you.
The Mortgage Centre -Sky Financial Team