Deficient Corporate Instalment Payments
Instalment payments for Parts I, VI, VI.1, and XIII.1 taxes are due on the last day of every complete month of the corporation’s taxation year. The first payment is due one month minus a day from the starting date of the corporation’s taxation year. The rest of the payments are due on the same day of each month that follows (eligible small-CCPCs can make quarterly, instead of monthly, instalment payments). The CRA considers a payment to have been made on the day they receive it, and not on the day you send it. If a payment due date falls on a Saturday, Sunday, or a public holiday recognized by the CRA, the CRA will consider the payment as being received on time for calculating instalment interest if they receive the payment on the first business day after the due date. You can view a corporation’s instalment due dates by using the “Calculate instalment payments” service through My Business Account at canada.ca/my-cra-business-account.
The CRA will normally charge interest on late or insufficient corporate instalment payments. The interest rate charge is based on the prescribed rate set forth in the Income Tax Regulations (see canada.ca/taxes-interest-rates). Instalment interest is compounded daily and is calculated based on the corporation’s instalment requirements for the year. Instalment interest and penalties are not deductible for tax purposes. Thus, it is prudent to avoid such charges whenever possible.
There are generally three methods which may be used to determine the amount of instalments a corporation owes. Two of the methods are based on taxes payable in the prior (or prior two) taxation years, and the third method allows a corporation to pay instalments based on its estimate of taxes payable for the year.
For purposes of computing interest due, a corporation is deemed to have been liable for instalment payments computed by whichever method gives rise to the least total amount of instalments of tax for the year. Since one of the allowable instalment methods is to base instalments on an estimate of corporate taxes payable for the year, if no corporate tax is payable for the year, no instalment interest will be charged. However, if a corporation estimates that no taxes will be payable for the year (and therefore makes no instalment payments), even if the estimate is made in good faith, the corporation will be deemed for the purposes of the instalment interest rules to have been liable to pay instalments on the basis of its actual taxes payable for the year (i.e. interest charges cannot be escaped by estimating that no taxes would be payable for the year if it turns out that the corporation does in fact owe taxes for the year).
You can request an interest review or a Statement of Interest by using the CRA’s “Enquiries” service and viewing a previously issued Statement of Interest Calculated using the CRA’s “View mail” service. To log in to or register for the CRA’s online services, go to: My Business Account at canada.ca/my-cra-business-account. If the corporation has an amount owing, you can view a revised balance that includes interest calculated to a date you select by using the “View and pay account balance” service and selecting the “Calculate future balance” option on My Business Account.
Contra-Interest Rules
As required by the Income Tax Act (the Act), the CRA uses the contra-interest method to calculate instalment interest. Under this method, an offsetting interest credit is created if an instalment is prepaid or over-paid, and this credit can reduce or eliminate interest otherwise charged on late or insufficient instalments.
The interest rate on tax refunds is lower than the interest rate charged on tax underpayments, including deficient instalment payments; however, when computing instalment interest due using the contra-interest method, the interest rate applied to prepayments and underpayments is the same.
Consequently, when instalments have not been paid on time, it is generally beneficial to make a catch-up payment that:
covers all previous underpayments, and
prepays remaining instalments due for the rest of the year (ideally, the prepayment should be equivalent to the underpayment, thereby reducing installment interest and penalty charges to nil).
If an excessive prepayment is made, the CRA will not refund any excess of the interest credit referred to above (i.e. the credit is solely used to calculate instalment interest charges).
Example:
Corporation ABC has a December 31 year-end and is required to make monthly instalment payments of $75,000 starting in January 2020. Corporation ABC only makes two instalment payments in the year. It makes one payment of $120K on March 12 and a second payment of $150K on April 25. When the CRA assesses Corporation ABC’s tax return for the year, it charges $16,081 in instalment interest, computed as follows:
Instalment Payment Number
Date 2020 payment due received Balance of days Interest
January 31 75,000 75,000 29 297
February 29 75,000 150,297 12 246
March 12 120,000 30,544 19 79
March 31 75,000 105,623 25 361
April 25 150,000 (44,015) 5 (30)
April 30 75,000 30,954 31 131
May 31 75,000 106,086 30 435
June 30 75,000 181,521 31 770
July 31 75,000 257,292 31 1,092
August 31 75,000 333,384 30 1,369
September 30 75,000 409,753 31 1,739
October 31 75,000 486,491 30 1,998
November 30 75,000 563,489 31 2,391
December 31 75,000 640,881 59 5,200
Total Interest $ 16,078
Penalties
When instalment interest due for a taxation year is more than $1,000, the CRA may charge an instalment penalty. The penalty is computed by subtracting from the instalment interest the greater of: 1) $1,000, and 2) 25% of the instalment interest calculated if no instalment payment had been made for the year. One-half of the difference is the amount of the penalty. For example, in the case of Corporation ABC, the CRA could assess a penalty of $4,480 (.5 $16,081—.25($28,483)).
The CRA charges arrears interest on an instalment penalty from the balance-due day to the date the penalty is paid.
Making Instalment Payments
To be on time, an instalment payment (or other payment due) must be made on or before the due date. A payment can be made using one of several methods, including paying:
online or by phone using a Canadian financial institution’s services;
online using the CRA’s My Payment service at canada.ca/cramy-payment;
via a pre-authorized debit agreement using the My Business Account service at canada.ca/my-cra-business-account;
by credit card through a third-party service provider;
in person at a Canadian financial institution or, for a fee, at a Canada Post retail outlet (to do so, you have to use a remittance form, which you can request online through My Business Account at canada.ca/my-crabusiness-account).
For further information on how payments can be made, visit canada.ca/payments or contact your financial institution.
Note that the CRA has standard personalized remittance vouchers that it normally sends with a corporation’s statements or notices. Such vouchers include: Form RC158: Remittance Voucher—Payment on Filing ; Form RC159: Remittance Voucher—Amount Owing ; Form RC160: Remittance Voucher—Interim Payments ; and Form RC177: Remittance Voucher—Balance Due . These forms are available only in paper format. It is important to use the correct voucher form when making a payment such that the payment is allocated to the appropriate account/tax debt. Form RC160: Interim Payments Remittance Voucher , should be used to make corporate instalment payments for a current taxation year. Form RC160 will show the remittance period-end (i.e. your monthly or quarterly instalment payment due date) as opposed to the taxation year-end date. Only use Form RC159 to make payments on an existing debt or to make an advance deposit for an anticipated reassessment.
To request a remittance voucher, visit My Business Account at canada.ca/my-cra-business-account, or call CRA Business Enquiries at 1-800-959-5525. We would be pleased to work with you to determine an optimal instalment payment schedule.
For more information, please contact info@gytdcpa.com or 1 844-GYTD-CPA
GYTDCPA.com-Deficient Corporate Instalment Payments
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