Tax Installments Overview

Tax Installments

By Eeva Harrop, CPA, CA, TEP, MSc.

September 29, 2020

 

With Covid-19, individual tax returns are now due September 30, 2020. This includes both filing the tax return, paying any tax due and paying any instalments that were due between March 18 and August 31, 2020.

The requirement to pay instalments can arise from many different sources, but the requirement is triggered when you file your personal tax return and the tax owing is greater than $3,000 in the current year and in either of the two preceding tax years.

Tax owing can result from:

• recurring income that is not subject to tax withholdings (i.e. investment income, rental income)
• for shareholders of corporations who received dividends, and that income is greater than deductions (i.e RRSP contributions or child care)
• a sale of property (i.e. sale of a vacation property)

When do you need to make instalments?

• When you owe the CRA more than $3,000 in the current tax year, AND
• If you had a tax liability of $3,000 in the current year and either of the 2 preceding years

How are instalments calculated?

1. The no-calculation option – where the CRA calculates your instalments and sends you reminders;
2. The prior-year option – instalments are based only your preceding year income; or
3. The current year option – instalments are based on your estimated current year

 

CRA reminders

If you have had an instalment requirement in the past 2 years (i.e. you have owed taxes of greater than $3,000 in each of the past 2 years), the CRA will send you instalment reminders. The first two instalments for the year (Mar and June) are based on the tax owing for the second preceding year, and the last two instalments for the year (Sept and Dec) are based on the tax owing for the prior year.

• If you pay the amounts on the instalments reminders, you will not be penalized if you actually owe more than $3,000 on your next tax return!
• If you decide to pay less in instalments and you have a tax liability of greater than $3,000, then you will be penalized for under remitting.

 

Can you change the instalment amount?

Yes! The CRA does not need to be informed which method is being used. However, it is important to review your method and the estimate of taxes owing to ensure that you are not under remitting instalments.

Instalment Planning

• You may receive an instalment reminder for March and June before you have finished preparing your tax return so you may not know your current tax liability when you receive your reminder notice, so
  • If you think you will owe less, then under remit for March, and then you can prepay the June amount. If you are penalized for the March payment, you will get interest credit for the June prepayment. (The CRA has contra-interest provisions it will apply)
• Even if you don’t have a requirement to pay instalments, if you have additional income that does not have tax withholdings you may want to make instalment payments to avoid a cash crunch on April 30^th.

 

Corporation

The date of filing a tax return is 6 months after the fiscal year end. With Covid-19, any corporate tax returns that were due between March 18 and August 31, are due September 30, 2020. This includes both filing the tax return, paying any tax due and paying any instalments.

Instalments:

• Where a corporation has total taxes payable for either the previous or the current year of more than $3,000, tax instalments are required and should be paid during the current year.
• A final true-up of the instalments to the actual tax liability is due 2 MONTHS after the fiscal year end date unless the corporation is a CCPC.
  • For a CCPC, the true up payment is due 3 MONTHS after the fiscal year end date
    • The CCPC must have taxable income of less than its business limit in the immediately preceding taxation year to get the 1 month extension
    • This also includes associated corporations

 

How are instalments calculated and when are they due?

Instalment amounts are calculated when your corporate tax return is prepared. Generally, instalments are due on the last day of every complete month of your tax year. If the corporation is an eligible CCPC, then instalments are due every complete quarter. The payment is considered received by the CRA when the tax payment is actually received or when the payment is processed by the financial institution.

 

Instalment interest

The CRA will charge interest and possibly penalties on late-paid and/or unpaid instalment balances. Interest is calculated on the date the payment is RECEIVED by the CRA and not when the payment is mailed. Penalties are assessed when the instalment interest charges in 2020 are more than $1,000.

Contra Interest on Instalments

• You can reduce or eliminate the interest charges and penalties by overpaying your next instalment payment or by paying it early. By paying early or overpaying, the corporation will earn instalment credit interest. This credit interest is not refundable but can be used against any interest charges on late payment for the same tax year.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2020 Shajani LLP