Sometimes even successful people run into debt problems. We see it often with small business owners who have not set up a proper tax remittance program with CRA. One day they wake up to a huge tax liability that isn’t likely to go away.
Chao and Xiaoling own their home and three investment properties between them, yet recently they were in a big mess with CRA. Chao is a self-employed IT consultant who bills more than $240,000 per year. Chao’s corporation pays he and Xiaoling a salary of $60,000 each year.
But Chao fell behind in remitting corporate and personal income taxes, and found they owe $98,000 to CRA. They also owe $64,000 in personal unsecured debt. As a result, their credit scores had slipped uncomfortably to the low 600’s.
Fortunately they are better investors than they are tax planners, as there is at least $200,000 equity in each of their three investment properties. Chao figured they would do a simple refinance of one of the rental properties and pay off their debts that way.
But most institutional lenders were not interested in touching their mortgage application. They do not like to use a mortgage refinance to pay off CRA debt.
Fortunately we found an alternative institutional lender who has agreed to a new first mortgage sufficient to cover the existing mortgage and ALL the debts. Sure the rate is a touch higher than the banks at 3.75% for one year, but the benefits are huge!
The last thing anyone wants is for this situation to repeat itself.
In a couple of months Chao and Xiaoling’s credit scores will rise significantly because their unsecured debts will be paid off. Our plan is to refinance another one of their other rental properties before year end and use the money as a war chest for additional CRA debt which will be owing for this tax year.
This time, we will be able to work with any lender we want with best terms and lowest rates, because there will be no current debt to CRA.
And finally, Chao and Xiaoling have now developed an installment payment plan to CRA for their personal and corporate taxes to ensure this cannot happen again.
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For many people, budgeting is a foreign concept. However, winners live within a budget, and losers have no plan, and often fail.