Do I Have to Make Tax Instalment

Tax instalment are a crucial aspect of the Canadian tax system that many individuals and businesses must navigate. These payments allow taxpayers to spread their tax liability throughout the year rather than facing a large lump sum payment when filing their annual return. Understanding when and how to pay tax instalment is essential for managing personal and corporate finances effectively, especially for those with self-employment, pension, investment, or rental income.

This guide aims to provide a comprehensive overview of tax instalment in Canada, covering both personal and corporate tax obligations. It will explore the criteria for determining whether you need to make instalments, the payment schedule, and methods for calculating the amounts due. Additionally, readers will learn about various payment options, including electronic payments, to ensure timely and accurate remittance to the Canada Revenue Agency. By the end of this article, taxpayers will clearly understand their tax instalment responsibilities and how to meet them efficiently.

Understanding Tax Instalment in Canada

Tax instalment are a crucial component of the Canadian tax system, designed to help individuals and businesses manage their tax obligations more effectively. These payments allow taxpayers to spread their tax liability throughout the year rather than facing a large lump sum payment when filing their annual return.

Definition of tax instalment

Tax instalments are essentially pre-payments of income tax that certain taxpayers must make throughout the year. These payments are made to the Canada Revenue Agency (CRA) every quarter, typically in March, June, September, and December. These instalments ensure that individuals and businesses with income sources that do not have tax withheld at the source still contribute to their tax obligations regularly.

Purpose of tax instalments

The primary goal of tax instalments is to prevent taxpayers from accumulating a significant tax debt by the end of the year. By making quarterly payments, individuals and businesses can better manage their cash flow and avoid the financial strain of a large tax bill when they file their annual returns. This system also helps the government maintain a steady stream of revenue throughout the year rather than receiving a large portion of tax payments all at once during tax season.

Who is required to pay tax instalments?

Not everyone is required to make tax instalment payments. The CRA has specific criteria for determining who must pay tax in instalments. Generally, individuals and businesses may have to make instalment payments if they meet the following conditions:

1. Their net tax owing exceeds a certain threshold. For most Canadian residents (except those in Quebec), this threshold is CAD 4,164.00. For Quebec residents, the threshold is CAD 2,498.40.
2. They have income sources that do not have sufficient tax withheld at the source. This often includes:

• Self-employment income
• Rental income
• Investment income
• Certain pension payments
• Income from multiple jobs where the combined tax withheld is insufficient

1. Their net tax owing exceeds the threshold for the current year and the two preceding years.

It’s important to note that the CRA typically sends instalment reminders to individuals who may be required to make these payments. However, receiving a reminder does not necessarily mean that a person must make instalment payments. The obligation to pay depends on whether their net tax owing exceeds the specified threshold.

For farmers and fishermen, different rules apply. They may be required to make instalment payments if their net tax owing has exceeded the threshold for three consecutive years. In such cases, they usually make a single instalment payment on December 31st.

If a taxpayer is required to make instalments but fails to do so, makes late payments, or pays insufficient amounts, they may face interest charges and penalties. Therefore, individuals and businesses must understand their tax instalment obligations and comply with the requirements to avoid additional costs.

By understanding the concept of tax instalments, who is required to pay them, and the purpose they serve, taxpayers can better manage their financial responsibilities and ensure compliance with Canadian tax regulations. This knowledge is precious for those with self-employment income, rental properties, investments, or other sources of income that do not have tax withheld at the source.

Determining Your Tax Instalment Obligations

To figure out if you need to make tax instalments, it’s crucial to understand the net tax owing threshold and how it applies to your situation. This threshold is critical in determining whether you must pay tax in instalments.

Net tax owing threshold.

For most Canadian residents, the net tax owing threshold is CAD 4,164.00. If your net tax owing exceeds this amount, you may have to make instalment payments. However, it’s important to note that exceeding this threshold alone doesn’t automatically require you to pay instalments.

You have to pay your income tax in instalments for the current year if two conditions are met:

1. Your net tax owing for the current year will be more than CAD 4,164.00.
2. Your net tax owing was more than CAD 4,164.00 in the previous calendar years.

This two-year look-back period helps ensure that those with consistently high tax obligations make regular payments throughout the year.

Provincial variations (Quebec vs. other provinces)

While the CAD 4,164.00 threshold applies to most Canadian residents, there’s a notable exception for Quebec residents. If you’re a resident of Quebec, the net tax owing threshold is lower, at CAD 2,498.40. This means Quebec residents may have to make instalments at a lower income level than residents of other provinces and territories.

For Quebec residents, the criteria for paying tax instalments are:

1. Your net tax owing for the current year will be more than CAD 2,498.40.
2. Your net tax owing was more than CAD 2,498.40 in the previous calendar years.

It’s worth noting that Quebec residents have separate federal and provincial tax obligations. The CAD 2,498.40 threshold applies to federal tax instalments for Quebec residents.

Calculating your net tax owing

To determine if you need to make instalment payments, you’ll need to calculate your net tax owing. This calculation involves several components:

1. Estimate your total annual income from all sources, including employment, self-employment, investments, and rental properties.
2. Calculate the tax you expect to owe based on this income.
3. Subtract any tax that has been or will be withheld at source (e.g., from employment income or certain pension payments).
4. The result is your estimated net tax owing.

If this amount exceeds the threshold for your province (CAD 4,164.00 for most provinces or CAD 2,498.40 for Quebec), and you met the threshold in one of the two previous years, you’ll likely need to make instalment payments.

It’s important to note that the Canada Revenue Agency (CRA) typically sends instalment reminders to individuals who may be required to make these payments. However, receiving a reminder doesn’t necessarily mean you must make instalment payments. The obligation to pay depends on whether your net tax owing exceeds the specified threshold.

If you’re unsure about your instalment obligations, you have three options to calculate your payments:

1. No-calculation option: Best if your income, deductions, and credits remain relatively stable yearly.
2. Prior-year option: Ideal if your current year’s financial situation is similar to the previous year but different from two years ago.
3. Current-year option: Best if your income, deductions, and credits have changed significantly from previous years.

Understanding these thresholds and calculation methods, you can better determine your tax instalment obligations and avoid potential interest charges or penalties for late or insufficient payments.

Tax Instalment Payment Schedule

Understanding the tax instalment payment schedule is crucial for individuals and businesses required to make these payments. The Canada Revenue Agency (CRA) has established a specific timeline for tax instalments to ensure a steady flow of tax revenue throughout the year.

Quarterly payment dates

For most taxpayers, tax instalments are due quarterly on the following dates:

1. March 15
2. June 15
3. September 15
4. December 15

It’s important to note that if any of these dates fall on a weekend or holiday, the payment is due on the next business day. The CRA typically sends instalment reminders twice yearly to help taxpayers stay on track. The February reminder covers the March and June payments, while the August reminder addresses the September and December payments.

For individuals whose primary source of income is self-employment from farming or fishing, the payment schedule differs. These taxpayers are generally required to make a single instalment payment due on December 31st.

Adjusting payments throughout the year

Taxpayers can adjust their instalment payments throughout the year based on changes in their financial situation. This adaptability is particularly beneficial for those who experience fluctuations in income or credits.

Suppose you initially base your instalment payments on your estimated current-year tax payable and anticipate a higher tax liability. In that case, you should consider increasing your instalment amounts for the remaining payments. Conversely, if you expect your tax payable to be lower than initially estimated, you may be able to reduce your payment amounts.

To modify your instalment payments, recalculate the new amounts and pay accordingly. Notifying the CRA of these recalculations during the year is unnecessary. However, it’s crucial to ensure that your total payments meet your tax obligations to avoid potential interest charges or penalties.

Consequences of missing payments

Failing to make tax instalment payments on time or paying insufficient amounts can have significant financial consequences. The CRA imposes interest charges on late or insufficient instalment payments, which are compounded daily at the prescribed interest rate. This rate is subject to change every three months and is typically higher than current commercial rates.

As of the fourth quarter of 2023, the prescribed interest rate was 9%. The interest is compounded daily, so the effective annual rate can exceed 9.4%, making it a substantial financial burden for those who fall behind on their payments.

In addition to interest charges, the CRA may also levy penalties for late or insufficient instalment payments. A penalty may be applied if the instalment interest charges for the year exceed CAD 1,388.00. The calculation of this penalty is based on a comparison between a flat rate of CAD 1,388.00 and 25% of the instalment interest that would have been charged if no instalment payments had been made.

To avoid these costly consequences, it’s advisable to:

1. Pay your instalments on time
2. Ensure you’re paying the correct amount
3. Consider overpaying your next instalment or paying early if you’ve missed previous payments

By adhering to the tax instalment payment schedule and understanding the flexibility to adjust payments, taxpayers can better manage their tax obligations and avoid unnecessary interest charges and penalties. It’s always recommended to consult with a tax professional or use the CRA’s online resources to ensure compliance with your specific tax instalment requirements.

Calculating Your Tax Instalment Amounts

When determining the amount of tax instalments you need to pay, the Canada Revenue Agency (CRA) offers three options. These options accommodate different financial situations and help taxpayers manage their tax obligations effectively. Let’s explore each of these options in detail.

No-calculation option

The no-calculation option is the simplest method for calculating tax instalments. This approach is ideal for individuals whose yearly income, deductions, and credits remain relatively stable. When you choose this option, you pay the amount suggested by the CRA on your instalment reminders.

The CRA calculates these suggested amounts based on your tax information from previous years. By following this method, you can avoid the hassle of complex calculations. Moreover, if you make these payments by the due dates, you won’t face any interest charges or penalties, even if your final tax owing is higher than the payments made.

Prior-year option

The prior-year option is best suited for taxpayers whose current year’s income, deductions, and credits are expected to be similar to the previous year but significantly different from two years ago. With this method, you calculate your current instalments based on your tax results from the immediately preceding year.

You must have your previous year’s tax information readily available to use this option. This approach can be beneficial if you’ve experienced a recent change in your financial situation that has stabilized over the past year.

Current-year option

The current-year option is most appropriate when you anticipate that your income, deductions, and credits for the current year will differ significantly from those in prior years. This method requires you to estimate your tax payable for the current year and base your instalment payments on this estimate.

While this option allows for the most accurate reflection of your current financial situation, it comes with some risks. You may face interest charges or penalties if you underestimate your tax liability and make insufficient payments. Therefore, this method is crucial to create a realistic and well-informed estimate.

Regardless of your option, the goal is to avoid overpaying your tax or ending up with a large balance owed when you file your return. Each instalment payment typically includes net tax due, Canada Pension Plan contributions based on your earnings, and any voluntary employment insurance payments.

For most taxpayers, these payments are made quarterly. However, if you’re a farmer or fisherman, you may have different payment schedules and calculation methods.

It’s important to note that you can adjust your instalment payments throughout the year if your financial situation changes. You can recalculate your payments using a different option if your initial choice no longer suits your circumstances.

Remember, while the CRA provides these options to help you manage your tax obligations, it’s always advisable to consult with a tax professional or use the CRA’s online resources to ensure you’re making the most appropriate choice. By understanding these options and choosing the best fits your circumstances, you can effectively manage your tax instalments and avoid unnecessary financial stress.

Methods of Paying Tax Instalments

The Canada Revenue Agency (CRA) offers various convenient methods for taxpayers to make their instalment payments. These options cater to different preferences and circumstances, ensuring that individuals and businesses can quickly fulfill their tax obligations.

Online payment options

Online payment methods have become increasingly popular due to their convenience and efficiency. The CRA provides several electronic payment options for tax instalments:

1. Online banking: Most Canadian banks and credit unions allow taxpayers to add the CRA as a payee for making instalment payments directly from their bank accounts. This method suits individuals paying income tax instalments, GST/HST, and other tax-related payments.
2. CRA My Payment: This online service allows taxpayers to pay using debit cards. It’s important to note that credit cards are not accepted through this platform.
3. Pre-authorized debit (PAD): Taxpayers can set up PAD payments through CRA My Account, My Business Account, or Represent a Client. This option allows scheduling one or more future payments, providing a convenient way to manage quarterly instalment payments.

When using online payment methods, it’s crucial to ensure that the correct payment option is selected to apply the payment accurately to your account.

In-person payments

For those who prefer face-to-face transactions, there are several in-person payment options available:

1. Bank or credit union: Taxpayers can make instalment payments at any bank or credit union in Canada. This method requires a remittance voucher, which is typically included in the instalment reminder package sent by the CRA.
2. Canada Post retail locations: Payments can be made at Canada Post outlets using a quick response (QR) code. This option accepts cash or debit card payments, but it’s important to note that service fees apply.
3. ATMs: Some banks and credit unions allow instalment payments through their ATMs. However, you may need to add the CRA as a payee through online banking or phone before using this method.

When making in-person payments, it’s essential to have the necessary documentation, such as remittance vouchers or QR codes, to ensure the payment is correctly applied to your account.

Mail-in payments

For those who prefer traditional methods, mailing in payments remains a viable option:

1. Cheque or money order: Taxpayers can send a cheque or money order made payable to the Receiver General for Canada. It’s crucial to include your social insurance number (SIN) or business number in the memo field of the cheque.
2. Remittance voucher: Include the remittance voucher provided by the CRA with your payment to ensure it’s applied correctly to your account.
3. Multiple post-dated cheques: You can send a series of post-dated cheques to cover your quarterly instalment payments for the year.

When mailing payments, it’s essential to allow sufficient time for delivery to avoid late payment penalties. The payment is considered received on the day it’s delivered to the CRA, which depends on mail delivery times.

Regardless of the payment method chosen, making instalments by the due dates is crucial to avoid interest charges and penalties. The CRA typically updates payment information in your account within 2 to 10 business days, depending on the payment method used.

By understanding these various payment options, taxpayers can choose the method that best suits their needs and ensure timely and accurate payment of their tax instalments.

Conclusion

Understanding and managing tax instalments is crucial for many Canadians to stay on top of their tax obligations. Taxpayers can avoid unnecessary stress and financial penalties by grasping the criteria for making instalment payments, calculating the right amounts, and choosing the most suitable payment method. This guide has shed light on the critical aspects of tax instalments, from determining if you need to pay to explore various payment options.

For those navigating the complexities of Canadian tax law, seeking professional help can be invaluable. BOMCAS Canada is your accounting firm when you have tax issues in CANADA. Staying informed and proactive about your tax responsibilities is the best way to ensure financial stability and peace of mind. By taking the time to understand and plan for tax instalments, you can manage your finances more effectively and avoid surprises when tax season rolls around.

FAQs

1. Is it necessary to make instalment payments to the CRA?
Yes, you may need to make tax instalment payments for the upcoming year if your net tax owing exceeds CAD 4,164.00 (CAD 2,498.40 for Quebec residents) for 2024 and in either 2023 or 2022. The payment dates for tax instalments are March 15 and June 15, with different rules applying to farmers and fishers with a single due date on December 31.

2. What are the consequences of not making instalment payments?
If instalment payments are late or insufficient, the CRA imposes instalment interest, which is compounded daily at the current prescribed interest rate. This rate may change every three months.

3. What could happen if you discontinue paying instalments?
Ceasing to make instalment payments can lead to severe consequences, including your account defaulting, the owed balance being forwarded to collections, potential legal actions from your lender, and a significant drop in your credit score. If you are facing financial difficulties, it’s crucial to understand your options and obligations.

4. What occurs if you fail to pay CRA instalments, according to discussions on Reddit?
Neglecting required instalment payments after receiving a reminder from the CRA can result in additional charges for instalment interest and penalties. Log into CRA MyAccount to verify if you have received an instalment reminder and to check the amount of interest you might owe if payments have not been made.