Paying Your Corporate Income Tax by Instalments
Most corporations are required to make instalment payments throughout the year as tax is usually not deducted at source on corporate earnings. It is important to understand these rules to ensure you pay a minimum amount of estimated taxes throughout the year without triggering interest or penalties on deficient instalment payments.
New corporations are not required to make instalment payments during their first year of operation. Corporations are also not required to make instalment payments if their income taxes payable in the current or previous year is $3,000 or less. In most other situations, you will be required to make monthly or quarterly instalment payments throughout each tax year.
Instalments are required for income that is subject to tax under Part I of the Income Tax Act . Most corporate earnings are subject to tax under Part I. Taxes assessed under Part VI (tax on capital of financial institutions), Part VI.1 (tax on corporations paying dividends on taxable preferred shares) and XIII.1 (additional tax on authorized foreign banks) are also included in the instalment requirements. Please note that taxes assessed under Part IV of the Act are not included. Corporations that receive dividend income and pay refundable taxes under Part IV are not required to pay instalments on these taxes even though the taxes payable exceeds $3,000.
Once it is determined that you are required to pay tax by instalments, you must make either monthly or quarterly payments. You can choose from three options to calculate these payments: current year estimated tax payable, previous year tax payable and a combination of the previous year and second previous year tax payable. Instalments are required based on the lowest amount calculated under these three options:
Payments of 1/12 of your current year estimated tax payable are required each month of the tax year. If you are eligible for quarterly payments, payments of 1/4 of your current year estimated tax payable are required each quarter of the tax year.
Payments of 1/12 of your prior year tax payable are required each month of the tax year. If you are eligible for quarterly payments, payments of 1/4 of your prior year tax payable are required each quarter of the tax year.
Payments of 1/12 of the tax payable from the year before the previous tax year are due in each of the first two months of the current tax year; then payments of 1/10 of the difference between the tax for the previous tax year and the total of the first 2 payments are due in each of the remaining 10 months of the tax year. If you are eligible for quarterly payments, a payment of 1/4 of the tax payable from the year before the previous tax year is due the first quarter of the current tax year. Quarterly payments of 1/3 of the difference between the tax for the previous tax year and the first payment is due in each of the remaining three quarters of the current tax year.
A small Canadian-controlled private corporation (CCPC) is eligible to make quarterly instalment payments if, at the time the payment is due:
it has a perfect compliance history
it has claimed a small business deduction for the current or previous tax year
together with any associated corporations, for the current or previous tax year:
it has taxable income of $500,000 or less
it has taxable capital employed in Canada for the tax year of $10 million or less
When a corporation ceases at any time in a tax year to be eligible to pay quarterly instalments, the corporation is still allowed to pay its next instalment due at the end of the current quarter; however, the corporation will have to begin to pay monthly instalments following that quarter.
Corporations that have a permanent establishment in Quebec or Alberta may need to make instalment payments to the provincial authorities. Instalments are required in Quebec and Alberta if taxes payable in the current or prior year exceeds $3,000 and $2,000, respectively. The requirements and calculation options mostly parallel the federal rules discussed above.
Interest will be charged at the prescribed interest rate on all unpaid, insufficient or late instalment payments. Interest will be calculated based on the option which results in the lowest amount. You will also be assessed a penalty if total interest charges exceed $1,000. If instalments are overpaid throughout the year, the amount can be refunded to you when your income tax return is assessed, or it can be transferred to the instalment account of the next tax year.
We would be happy to assist you in calculating your required instalment payments under the different options and advising on which option is best for you.
For more information, please contact email@example.com or 1 844-GYTD-CPA