What are income tax instalments?
When you or your accountant file your taxes, you may notice an "Instalments" page at the end of your return.
Tax instalments are a required tax program for individuals who had to pay $3,000 or more ($1,800 in Quebec) in income tax the previous tax year and either of the two years before that. This threshold is seen as a significant amount to CRA, so instead of simply paying your amount owing each year by April 30th, they require you to prepay your income tax throughout the tax year.
Tax instalments are due on March 15, June 15, September 15, and December 15th for the tax year, with the final payment due on April 30th if you owe more than your instalments. If you overpay your instalments, you may even get a refund!
Who has to pay?
This program applies to anyone whose income tax payable was more than $3,000 in the last tax year or the two years before that. Most commonly, this applies to people who are self-employed or have investment income. If you earned this income through an employment job, your employer would remit regular amounts to CRA on your behalf - this program is essentially the same thing but with quarterly payments.
The CRA sends instalment reminders to those who will have to pay tax instalments and includes the amount to pay. However, you cannot simply rely on CRA reminders for your instalments–you still have to pay if you owe and don’t get a reminder!
The reminders come:
February for the March payment;
June for the August payment; and
August for the September and December payments.
If this is your first year paying income tax instalments, you may not have to make the first payment until September 15th, but check your income tax returns and CRA reminder to confirm.
How much do I have to pay?
No-calculation option
This option is best if your annual income, deductions, and credits stay about the same. The CRA determines the instalment payment amount based on the information from your latest assessed tax return. The amount for the no-calculation option will be indicated on the instalment reminders that they send you.
Prior-year option
This option is best if your current year's income, deductions, and credits are similar to last year but significantly different from the previous year. You determine the amount of your instalment payments based on the information from your tax return for the prior tax year. CRA will not charge instalment interest or a penalty unless your estimated instalment amounts are too low.
Current-year option
This option is best if your current year's income, deductions, and credits will significantly differ from those you have had before. You determine the amount of your instalment payments based on your estimated current year income tax and CPP. CRA will not charge instalment interest or a penalty unless your estimated instalment amounts are too low.
How do I pay Instalments?
The easiest way to pay your instalments is through online banking. Most banks allow you to set up a bill payment to your SIN (or BN for Corporate instalments). Make sure to apply the payment to the next tax year (for example, when you pay by September 15th, choose the 2022 tax year).
Once the payment has been processed, you’ll be able to see the balance in your CRA My Account or My Business Account. You won’t see an “amount owing” but will be able to find all the details under your payment account.
Does this show up on my tax return?
Absolutely! Instalment payments are applied against your total balance owing when you file your taxes annually. The remainder owing is due by April 30th. The benefit to the instalment program is that it can help with cash flow!
What if I don’t pay?
There is instalment interest and possible penalties if you don’t make payments to this mandatory program.
CRA will charge interest if:
You are required to make instalment payments in the tax year
You received a reminder about the payments
You did not make any payments, paid late, or paid less than the amount you had to pay
You may have to pay a penalty if your instalment payments are late or less than the required amount. CRA applies this penalty only if your annual instalment interest charges are more than $1,000.
If you haven’t been making your instalment payments and want to reduce your interest charges, make sure to overpay on the following instalment amount to help reduce your overall interest.
RESOURCES:
When you start a new business, taxes and business finances can feel intimidating. Book your discovery call now and receive a FREE onboarding strategy call with health industry experts as part of your annual tax filing package.
PS: These spots fill up fast every year, so don’t delay and book your discovery call now!