Do You Need to Pay CRA Instalments?Brian Jang ON September 8, 2021
Each year, nearly 1.8 million Canadians are expected to pay income tax instalments. The reality, however, is that many make the assumption that doing so is not truly necessary. They may even go so far as to completely disregard CRA reminders and as a result, they find themselves having to pay interest.
Who Has to Pay Instalments?
An individual who is a sole-proprietor or small business owner with a net tax of more than $3,000 owing in the current year and either of the two previous years (say, 2021 and 2019) will have to pay personal tax in instalments during the year, rather than in one large payment the next year on April 30. The payments are due on the following schedule:
- March 15
- June 15
- September 15
- December 15
When you first owe more than $3,000 in a given year, you will receive a formal letter following the filing of your taxes. While you may be tempted to dismiss it, the CRA will be expecting your first instalment prepayment on September 15.
The CRA will use the information from your most recent assessed tax return to determine the amount of your instalments and will send you reminders. There are three ways to calculate the amount of your instalment payments:
- No-calculation Option
This method is only suitable when you believe that your income will remain steady, not varying from year to year.
- Prior Year Option
This option is suitable when your 2021 income will be about the same as that of 2020, but significantly different from 2019. For example, if you had an excellent year in 2020, but 2019 was much weaker, this would be your best bet.
- Current Year Option
If your business is expanding each year and you suspect that your income will be significantly higher than last year, this may be your best option. You can approximate your instalment payments by estimating your current year and using the calculation chart for 2021 instalment payments. Failing to make full payments by the due dates will result in interest being charged.
You can pay your entire bill once per year if your GST/ HST remittance for the year is under $3,000. If your returns are filed annually and you make up to $1,500,000 in sales, however, you will need to make quarterly payments due on April 30 (Q1), July 31 (Q2), October 31 (Q3), and January 31 (Q4). Calculate each payment as one quarter of the amount you owed last year. If your GST/ HST payment last year was $4,000, your instalments will be $1,000 each. But what happens if this year you owe $5,000?
In this scenario, you will owe an additional $1,000 when you file at the end of March. At the end of April, your first quarter payment would increase to $1,250, because your latest remittance would now be $5,000.
Having a good accountant can benefit you greatly, informing you if you will be earning more than your previous year, allowing you to increase your instalments and thus reduce the amount of taxes you will owe at filing. Taxes are one of the few certainties in life, so it’s worth seeking assistance with understanding the rules and avoiding penalties.
You will need to make instalments toward your tax bill for the next year if you owed more than $3,000 on your last income tax return, though there is an exception for new corporations, as instalment payments do not begin until your second year of operation.
Instalments will be made monthly, totalling the amount of tax owed at the previous tax year’s end. Due dates will depend on the start of your business’s tax year, with due date examples available on the CRA website. Keep in mind that owing a balance at the end of the year means you will be accruing interest on unpaid instalments going back to the due dates of the missed payment. Interest on instalments is compounded daily at the prescribed rates. Currently, the amount for overdue taxes is 5%
It’s important to take the formal letter from your accountant and the instalment reminders seriously if you wish to avoid being charged interest on your instalments.