Yes… no… well, maybe.
What Are Installment Payments?
In Canada, if you owe more than $3,000 in income tax ($1,800 in Quebec) when you file your tax return, the CRA may require you to pay your taxes in installments for the following year. This is a prepayment system where you pay your tax obligation throughout the year rather than in a lump sum at filing.
Of particular note is that installments are not required but are recommended to avoid interest costs. The CRA cannot take any steps to collect installments if you do not submit payments through the year. In situations where cash flow is tight, such as now for some people, you can decide not to pay installments in exchange for paying interest when your tax return is assessed.
Who Must Pay Installments?
- Individuals: If your net tax owing is over $3,000 in both the current and either of the two previous years.
- Corporations: Must generally pay installments if their total taxes payable are more than $3,000 in either the current or previous year.
- Self-Employed: Since there’s no tax deducted at source (like payroll), many self-employed individuals must pay installments.
Installment Payment Due Dates
For individuals:
- March 15
- June 15
- September 15
- December 15
For corporations:
- Typically, monthly installments, due on the last day of each month (exceptions apply for small Canadian-controlled private corporations (CCPCs) — they may qualify for quarterly payments).
How Are Installments Calculated?
The CRA suggests three options:
- No-Calculation Option (based on CRA's reminder):
- They send you an installment reminder based on your previous years’ taxes.
- Prior-Year Option:
- Pay based on the amount you owed last year, split evenly among the four due dates.
- Current-Year Option:
- Estimate your current year’s taxes and divide evenly.
Choosing the correct method can help minimize installment interest or penalties.
Penalties for Missing Installments
If you do not pay the correct amount on time, the CRA may charge installment interest and potentially an installment penalty if your interest exceeds $1,000.
- The interest rate is the prescribed CRA interest rate (non-deductible for individuals, but deductible for businesses).
Tax Planning Tips for Installment Payments
- Accurate Forecasting:
- Estimate your income early to determine if your tax will be lower this year and adjust installments accordingly.
- Use CRA Online Services:
- Monitor your installment account through CRA’s My Account (individuals) or My Business Account (businesses).
- Set Up Pre-Authorized Debits (PAD):
- Automate installment payments to avoid late payments.
- Optimize Cash Flow:
- Time your payments to align with your cash inflows, especially for seasonal businesses.
- Invest in High-Interest Savings:
- Hold the installment funds in a HISA or short-term GIC until close to the due date.
- Consider the Current-Year Method:
- If your income dropped (e.g., retirement, business downturn), you might pay less by using the current-year option rather than CRA's prior year estimates.
- Claim Deductions and Credits Early:
- Strategically plan RRSP contributions, business expenses, or other deductions to lower your overall tax payable.
Example (Individual) (scenario - retiring mid-year)
- 2024 tax owing: $4,000
- 2025 estimated tax: $2,000
Rather than paying four installments of $1,000 based on 2024, you can use the current-year method and pay $500 per installment.
By being proactive, you can manage your cashflow, save money, and avoid penalties, but if paying now isn’t an option, don’t worry. Nobody will not be contacting you to demand payment.
Doing your own taxes may save a bit of money, however if you are unsure of what method to use or cannot estimate the amount you will possibly owe next April, or if you cannot afford to pay them right now, you should be contacting our office especially if your taxes are complex.