Canada Revenue Agency (CRA) is reminding people who pay their income tax by installments that their next payment is due on September 15.
In a message posted on its website, the CRA pointed out that taxpayers can go online to see what they owe and make payments. And if you pay in instalments, you can sign up for email reminders one month before your taxes are due.
But first, you must determine if you’re among those required to pay their tax obligations in intalments. If tax isn’t withheld from your earnings or not enough was withheld for more than one year, you may have to pay tax in instalments. This can happen if you earn rental, investment, or self-employment income, certain pension payments, or have income from more than one job.
The instalments are to cover tax you would normally have to pay in a lump sum on April 30 of the following year. Instalments aren’t paid in advance; they’re paid during the calendar year in which you’re earning the taxable income.
Take into account three factors when determining if you must pay instalments:
The province or territory where you live determines the threshold used to determine if you must pay instalments. If your total tax liability, minus any amount withheld at source, is more than $3,000 for both the current year and either of the two preceding years, you must make instalments for the current year. (In Québec where provincial tax is collected by the province, the threshold is $1,800 for both federal and provincial tax.)
If you farm or fish for a living and are self employed, the rules are slightly different. You’ll receive a reminder in November and must make a single payment on December 31, 2016, if in each of the years 2014, 2015 and 2016 your total tax obligation exceeded the thresholds.
Instalment payments are calculated using your total tax owed plus any Canada Pension Plan (CPP) contributions owed and voluntary Employment Insurance (EI) premiums payable on self-employment and other eligible earnings.
(In Québec, instalment payments cover income tax plus the health contribution, contributions to the Québec Pension Plan and the Health Services Fund as well as premiums to the Québec Prescription Drug Insurance Plan and the Québec Parental Insurance Plan.)
If you received an instalment reminder from the CRA that shows an amount to pay, you may have to pay by instalments, unless your total tax owed for 2016 will be at, or less than, the thresholds.
The CRA determines who’s required to pay instalments from previous years’ tax returns and sends reminders. But keep these factors in mind and discuss with your advisor:
You need only make an instalment payment if the CRA sends you a reminder. If you don’t receive one, you don’t have to make instalments, even if your tax liability exceeds the thresholds.
If you do receive a reminder, it’s based on the past. If you and your advisor are certain your current tax liability won’t exceed the threshold, you aren’t required to make an instalment payment. (The rules are similar in Québec.)
Instalments are due quarterly, on the 15th day of March, June, September and December. Reminders are sent out twice a year — in February for March and June payments and in August for September and December instalments.
Your final tax obligation is known only when you file your annual income tax return. If you owe more than the instalments, the balance must be paid by April 30. So plan ahead.
There are three calculation options when it comes to instalment payments:
If you use the latter two options, and make the payments in full by their due dates, the CRA won’t charge instalment interest or a penalty unless the total instalment amount you use is too low.
If you receive a reminder only in August, your payment depends on your calculation option. If you opt for the CRA, no-calculation method, pay the amount in the reminder on the 15th day of September and December.
If you choose prior-year calculation, your accountant can determine your 2015 tax obligation and add any CPP contributions and voluntary EI premiums payable. You’ll pay 75% of the total on September 15 and 25% on December 15. The same holds for the current-year option except your accountant will estimate your 2016 tax obligation.
As with all tax payments, if the due date falls on a Saturday, Sunday or public holiday the CRA recognizes, your payment is considered on time if it is received or postmarked on the next business day.
Bear in mind that the CRA’s method of calculating instalments may result in an overpayment. This may happen if your income has been decreasing over the past two years.
You may also receive a reminder if your income jumped in a year from a one-time event, such as a capital gain without tax being withheld or if your sources of income changed from employment to retirement fund withdrawals without arranging for tax withholdings.
If you fail to pay the required amounts on time, you could be charged substantial interest and penalties. First, there’s instalment interest calculated at the CRA’s prescribed rate. For overdue taxes that amounts to 5% in the current quarter.
Second, instalment interest charges are compounded daily, so the 5% interest rate is effectively an annual rate of 5.13%.
Third, there is a steep penalty for making late instalments or paying less than the required amount if instalment interest for 2016 is more than $1,000. To calculate the penalty, your accountant will determine which of the following amounts is higher:
Then he or she will subtract the higher amount from the actual instalment interest charges for 2016. Dividing the difference by two is the penalty amount.
(In Québec, additional interest of 10% a year compounded daily is applied when the amount of the payment is less than 75% of the amount you’re required to pay. This brings the effective annual interest rate to approximately 17%. The current interest rate charged in Québec is 6%).
Clearly it’s advisable to pay instalments on time, even if you must borrow to do so. Because the CRA rates currently are higher than short-term borrowing rates, you should be able to get a better rate at a financial institution.
You can reduce or eliminate the interest charges and penalties on late instalments by overpaying subsequent instalments or paying them before their due dates. Interest earned on early or excess payments will be offset against any interest charges on late payments. Since instalment penalties are charged on the net interest, they’ll also be reduced.
Receiving an instalment payment reminder lets you know taxes aren’t being withheld from income at source. It may be necessary to make provisions for those taxes if you want to avoid having to come up with the entire amount when you file your income tax return in the spring. Consult your accountant to come up with the best way you can stay on top of your tax obligations.
How Corporations Pay Tax
Generally, corporations have to pay their taxes in instalments.
Instalment payments are due on the last day of every complete month of your tax year or of every complete quarter if you’re an eligible small CCPC.
The first payment is due one month or one quarter less a day from the starting day of your tax year. The rest of the payments are due on the same day of each month or of each quarter that follows.
The balance of tax is paid two or three months after the end of the tax year — depending on your corporation’s balance due day — after making deductions for instalments paid during the year.
After all monthly or quarterly interim payments are made for the current year, you’ll receive the first Form RC160, Interim Payment Remittance Voucher, for the next year, along with another Form RC160. This additional form will show the tax year-end of the current year. Use this form to remit your balance-due-day payment, if applicable.