Home Equity Loans, also known as Private Mortgages for the self-employed.
Sometimes small business owners, even successful ones, find themselves owing large personal income tax amounts to the Canada Revenue Agency.
You don’t have to be self-employed to owe CRA money but it’s most common with business owners as they are in charge of managing their own taxes. If you are employed by a company, you’ll note on your paystub that the proper tax deductions are made for you.
Recently, we helped a self-employed Financial Advisor to pay CRA just shy of $100,000. His company has been experiencing rapid growth over the past few years but it really took off about a year ago. As you can imagine, he was very busy managing the business and trying to keep up with customer demand. The problem is that he forgot to put a tax plan in place and was shocked when the Canada Revenue Agency sent him a bill for just under $100,000.
Can’t I just go to my bank and use the equity in my home?
Like many Canadians, he figured he could just refinance his home and use the equity to pay the income tax debt. What many are surprised to learn is that institutional lenders such as banks and credit unions, do not offer refinances for the purpose of paying any government-related debts, such as income tax.
The good news is that there are alternative mortgage providers who offer programs designed to help those who need to pay income tax debt and other debts that banks and credit unions won’t currently help with.
In this particular case, we secured a second mortgage, allowing us to leave the traditional mortgage in place. The second mortgage was used to pay off CRA and clear the debt.
Our client avoided late filing and interest penalties which can grow every month. The late filing penalty is 5% of the outstanding balance plus 1% every month. This equated to $5,000 plus $1000 every month until the bill is paid.
Visit the Government of Canada website for a detailed explanation of their tax penalty formula.
Once CRA was made whole again, we then refinanced the first mortgage with a traditional lender to pay off the higher interest second mortgage. Our client has now has a proper tax plan in place and will be prepared for future tax filings and hopefully, won’t require an alternative mortgage anytime soon.
Home Equity Loans and Private Mortgages can be extremely helpful to small business owners and offer quick temporary relief. In this article, we discussed how home equity can be used to pay tax debts but in reality, your home equity can be used for just about anything you like. While staying on the topic of self-employed Canadians, you may choose to use your home equity to invest in equipment, product, employees, and even property.
If you find yourself in a situation where you need access to money but aren’t sure if a Home Equity Loan is right for you, just give us a call or send us an email and we will be happy to provide you free and unbiased advice.