Income Tax Instalments
Paying taxes is hard enough, but the government wants the money sooner than the filing deadline for the tax return. Canadian residents with income that has insufficient or no tax withheld may have to pay tax by instalments. This can happen particularly to those who receive rental, investment, or self-employment income.
Individuals: An individual must make instalment payments if the total tax liability in each of the current year and either of the two preceding years exceeds the amount of tax withheld at source by $2,000 ($1,200 for Quebec residents). If instalments are required, the payments are due March 15, June 15, September 15 and December 15.
Required instalments can be calculated in three ways:
- Current year option: The percentage of the estimated tax payable for the current year.
- Prior-year option: The percentage of the tax payable from the immediately preceding year.
- No-calculation option: The Canada Customs and Revenue Agency (CCRA) will provide the amounts on instalment reminders it mails in February and August. It calculates these amounts as the percentage of the net tax owing for the second preceding year for the March and June instalments, and for September and December, ½ of the excess of the net tax owing for the immediately preceding year over the sum of the two instalments required at March and June.
The individual taxpayer has the right to choose the most favorable of these options; however, interest is charged on a daily basis at the prescribed rate on late or insufficient payments. Insufficient instalment payments are calculated by comparing the taxpayer's actual instalments to the lowest amount under the three options listed above.
If the individual taxpayer makes late or insufficient income tax instalments, he or she may choose to overpay the later instalments. By overpaying, the taxpayer may earn "contra-interest" (or interest credits that will partially or fully offset the interest calculated on earlier underpayments for the year) at the prescribed rate, thereby limiting the interest charged on insufficient instalments.
Paying subsequent instalments early will produce a similar result. Self-employed taxpayers are required to increase their instalment payments by the amount of Canada Pension Plan contributions payable. The CCRA's Guide P110 - Paying Your Income Tax by Instalments provides further details on CPP instalments.
Corporations: A corporation must make instalment payments at the end of each month. Instalments are required if the preceding year's income tax liability was over $1,000 and it is expected that the current year's income tax liability will be over $1,000. Even though instalments could be based on expected income tax liability, the final actual tax will determine how much the instalments should have been. Similar to individuals, corporations can earn contra-interest to offset insufficient instalment interest. In this fashion, corporations can fine tune their instalment obligations based on the results realized throughout the year. The CCRA's Guide T7B-CORP - Corporation Instalment Guide provides further details.
It should be noted that interest paid on late or insufficient instalments is not tax deductible for individuals or corporations.
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