If you receive income that has no tax withheld or not enough tax withheld, you may fall into Revenue Canada’s (CRA hereafter) installment system.
Generally, you may be required to pay your current year’s income tax by installments if your net tax owing is more than $3,000 (or $1,800 if the taxpayer lived in Quebec for any of the years in question):
- In the current year; and
- In either one of the two preceding years
You do not have to pay installments for the current year if you net tax owing will be $3,000 or less.
There are separate rules for farming and fishing income, discussed below.
Installments are due quarterly on March 15, June 15, September 15 and December 15.
What is Net Tax Owing?
Generally, this is the amount you owe on your tax return before installments. For self-employed persons, you must also add to net tax owing the amounts for CPP contributions payable when determining installment amounts below (this included in “net tax owing” hereafter). CRA has a chart to help you with the calculation. It can be found on their website Here.
There are 3 options available for calculating installments. You do not have to let CRA know which option you will use. They are the following:
1. No-calculation option
If your income, deductions, and credits (and net tax owing) remain about the same year to year, this is the best option for you. If you had an installment liability in one of the two preceding years, CRA should automatically send you installment reminders for the current year. The reminders are sent out in February for the March 15 and June 15 payments, and in August for the September 15 and December 15 payments. If reminders are sent, you do not have to use the above noted worksheet to calculate your net tax owing under this option – CRA does it for you.
The amounts on the reminders are calculated as follows:
- Installments for March 15 and June 15 – equal to 25% of your 2nd preceding tax year net tax owing.
- Installments for September 15 and December 15 – equal to your previous year net tax owing less the amount installed in March 15 and June 15. The difference is divided equally between September 15 and December 15 payments.
The advantage of paying according to the reminders (the amount and by the due date) is that you will avoid any installment interest and penalties. If you have made payments prior to receiving a reminder, you need only to pay up to the amount shown on the notice so to avoid overpayment. The reminder amounts are not adjusted to reflect payments you have made.
The disadvantages of using this option are if your income fluctuates from year to year (i.e. due to extraordinarily high gains) or your unwithheld income increases during the year. With the latter, you may have a large tax payment in April if you only pay according to the reminders. You can use another basis for calculation (below), but some risk is involved in ensuring you have installed enough.
2. Prior-year option
Under this option, your installments are based on the preceding year’s tax owing, divided by 4 (payment for each quarter). This option is best for you if your current year’s income is expected to be similar to that of the prior year.
3. Current-year option
This option is best for you if you expect your net tax owing for the current year to be much less than either of the two preceding years. Use that installment chart to calculate this amount. Your installments will be based on your estimated current year net tax owing, divided by 4. The disadvantage of using this option is if your actual tax owing is higher than what you have installed, you could be faced with substantial interest and penalties, as described below.
Installment Interest and Penalty Charges
Installment interest may be charged if all of the conditions apply:
- CRA sends an installment reminder;
- You are required to make installment payments (based on one of the options above); and
- You do not make any payments, or you make payments that are late or less than the required amount.
Interest, calculated daily at the prescribed rates, is the difference between:
- Total interest on each installment that you should have paid; and
- Interest on each installment you did pay (i.e. interest the government would have to pay you if your installments were refunded as a result of no tax owing for the year)
The difference must be a minimum of $25 and based on this calculation, you essentially can eliminate any interest charge by overpaying your next installment or paying it early.
Installment penalties can be levied if your installment interest charges are more than $1,000. The penalty is 50% of the installment interest, minus the greater of:
- $1,000; or
- 25% of the installment interest you would have had to pay had you made no installments during the year.
How To Make Your Payments
The following options are available:
- Pay electronically through online banking, my payment (CRA’s Interac online), or directly at your bank using form INNS3.
- Have your payments automatically debited from your account by accessing your “My Account” on the CRA website.
- Send a cheque or money order to CRA (write your SIN number on the back). CRA does accept post-dated cheques.
Farming and Fishing
If your main source of income in the current year is self-employment from farming or fishing and in each of the two preceding years and the current year your net tax owing is more than $3,000 ($1,800 if in Quebec), you have to make one installment payment by December 31 of the current year. Suggested installment payments on the reminder (sent in November) are two-thirds of your prior year net tax owing.
Updated February 2015