How to avoid fees and interest charges on your GST/HST collections.

You probably don’t know this, but if you paid $3,000 or more in GST/HST last year, you have to pay quarterly installments this year. If you file monthly or quarterly, you can ignore this post because you are already calculating your actual GST/HST payable and paying at least quarterly.

If you are an annual filer, this is for you!

As I mentioned, if you had to pay $3,000 or more in GST/HST to CRA for last year, then this year, you have to pay quarterly installments. Your first installment payment is due one month after your first quarter-end of the new year. For most of us, that means that your annual 2020 payment AND your first instalment payment for 2021 are both due April 30th.

There are a couple of different ways you can calculate what you owe:

Base your installment payments on your previous year - each of your instalment payments will be ¼ of your previous year’s total GST/HST payable.
Base your installment payments on your current year - each of your instalment payments will be based on your estimate of your net tax payable for this year.

If you go with Option 2, but the total amount you estimate and pay is less than what you actually owe, CRA will charge installment interest on the difference. This installment interest is charged on any installment that was not paid or was paid late and is added at the end of the year. If you realize that you paid less than your required installment payment anytime in the year, you can reduce this interest by overpaying your next installment payment or paying early.

If you go with Option 1 and make your payments in full and on time, CRA will not charge instalment interest even if your net tax for the year is more than the instalments you made.

Example

Your net tax for 2020 was $5,000. You estimate that your net tax for 2021 will be $4,000. You choose to make quarterly instalments of $1,000 each based on your estimate for 2021.

At the end of 2021, you calculate your net tax, and it is actually $5,500. The difference of $1,500 will be charged as installment interest based on compound daily interest at the CRA’s prescribed rate for the current year.

If you went with Option 1 and paid ¼ of your 2020 total GST/HST of $1,250 quarterly installment, then you would not have instalment interest on the $500 difference.

There are special rules for your first year of business, and the $3,000 for the year is prorated from the day you register for GST/HST. Keep this in mind for deciding if you need to make instalment payments in 2021!

I always recommend my clients choose quarterly filing once they have to pay installments because the filing itself doesn’t take very long (the bookkeeping is another thing!). That way, you always make sure never to overpay your GST/HST and always avoid interest!

RESOURCES:

You can read more about GST/HST installment requirements here.

Make sure to share this blog or our video training on YouTube with all your colleagues! If you are wondering whether it’s time to register or have questions about what option is best for you, book a strategy call, and we can make sure you choose the right option for you and your business.

Use this link to book a 1-hour strategy call!