Clearing The Confusion On Tax Instalments
You may have received an instalment reminder in the mail and are wondering whether you have to make these payments, how much they are, and when they are due. This article aims to clarify some of the confusion surrounding personal and corporate tax instalments.
What Are Instalments?
The CRA requires individuals and businesses to make monthly or quarterly instalments, towards their tax account so that taxes are received throughout the year rather than collecting all of its tax revenue in a lump sum.
Personal Tax Instalments
When you earn income without having tax withheld, or that does not have enough tax withheld for consecutive years, you may be required to make personal tax instalments. Income from self-employment, rental properties, investments, and certain pension payments may not have tax withheld at the source and can result in an unexpected tax bill later in the year.
Similarly, when working at more than one job your employers may not deduct the appropriate amount of tax from your paychecks. Therefore, it is important to review your sources of income regularly to check whether the appropriate amount of income tax is being withheld. If not, consider setting aside some income to cover the tax on this come tax time.
When must you make personal tax instalments? You must make personal tax instalments if both of the following criteria are met:
- Your net tax owing for the current tax year will be over $3,000 ($1,800 for residents of Quebec); and
- Your net tax owing in either of the two previous tax years was over $3,000 ($1,800 for residents of Quebec)
The CRA will send out instalment reminder slips to those individuals who may be required to make instalments based on their prior year taxes owing.
If you are required to make personal tax instalments you may choose one of the following three options to calculate the amount of each instalment:
- No calculation option – use the amounts listed on your CRA instalment reminder slip. This is the simplest method and is useful if your income, deductions, and credits are similar each year.
- Prior-year option – use the net tax owing in the previous year and divide the figure by 4 to determine the quarterly payment amount. This option is useful if your current-year income, deductions, and credits will be similar to the prior year, but different from the second previous year.
- Current-year option – estimate your current-year net tax owing and divide the figure by 4 to determine the quarterly payment amount. This option is best if your current-year income, deductions, and credits will be significantly different than in the last two years.
If you choose to calculate your instalments using option 2 or 3 above, the CRA may charge interest if the estimated net tax owing for the year is less than the actual net tax owing for the year. If your actual net tax owing is less than the estimated amount, any excess payments can either be refunded to you or be applied to the next tax year.
Due date:
Personal tax instalments are due quarterly on March 15, June 15, September 15, and December 15. CRA will start to charge interest on each installment amount from the date it was due if not made.
Corporate Tax Instalments
Similar to individuals, a company is required to make corporate tax instalments if it has Federal taxes payable of $3,000 or more in both the current and previous tax year. Alberta and Quebec collect corporate taxes separate from the Federal government and have similar thresholds. Companies in their first year of operations are not required to make instalments.
There are three choices available to calculate the number of total tax instalments a company will have to pay during the year:
- Current-year option – base the total instalment amount on the estimated current year tax payable balance.
- Prior-year option – base the total instalment amount on the previous year tax payable balance.
- Combination of the previous year and second previous year – base the total instalment amount on a combination of the previous two tax year’s tax payable balances. The CRA provides helpful worksheets to calculate this method.
Typically, instalments are due monthly, but some smaller private companies may qualify to make installments quarterly. All instalments are due at the end of each month or quarter.
GST/HST Instalments
Annual GST/HST filers that have a net GST/HST balance payable over $3,000 in both the current and previous return periods are required to make quarterly instalments that are due one month after each quarter. The filer has the option to calculate each instalment payment as either:
- 1/4 of the total estimated GST/HST tax payable for the current year; or
- 1/4 of the GST/HST payable balance in the prior year
Whether you are an individual or own a company, setting out some time to schedule and understand your tax reporting and payment deadlines can help to reduce the stress and confusion surrounding your taxes and help set yourself up for a smooth tax year. If you would like to understand your installment requirement better, please contact your Avisar professional.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
