Updated: Mar 3
You may be required to make instalment payments throughout the year if you earn income on which tax is not withheld at source or not enough tax is withheld, such as self-employment earnings, pension payments, investment or rental income. 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.
There are two factors to assess to determine your requirement to pay tax by instalments: your province of residence on December 31 and your net tax owing per your tax return. You are required to make instalment payments if your net tax owing will be greater than the provincial threshold in the current year and in at least one of the previous two years. The threshold is $1,800 for residents of Quebec and $3,000 for residents of all other provinces and territories.
Once it is determined that you are required to pay tax by instalments, you must make quarterly payments no later than March 15, June 15, September 15 and December 15. You can choose from three options to calculate these quarterly payments: the no-calculation option, the prior-year option and the current-year option. The no-calculation option is the default option used by CRA to generate instalment reminders, but the other two methods may be more beneficial to you.
Under the “no-calculation option,” your quarterly payments are calculated as 25% of the net tax owing per your most recent assessed tax return. This option is best if your income, deductions and credits are approximately the same each year.
Under the “prior-year option,” your quarterly payments are calculated as 25% of the net tax owing in the immediately preceding year. This option is best if your income, deductions and credits are approximately the same as the preceding year but have changed significantly from the second preceding year.
Under the “current-year option,” your quarterly payments are calculated as 25% your estimated net tax owing for the current year. This option is best if your income, deductions and credits have significantly changed from prior years.
You are not required to report which option you choose on your tax return. You can re-evaluate your estimated net tax owing throughout the year and adjust future instalment payments accordingly. By choosing the best option for you, you will not overpay throughout the year or have a significant balance owing.
Interest will be charged at the prescribed interest rate on all unpaid, insufficient or late instalment payments if you received an instalment reminder from Canada Revenue Agency and were required to pay based on the criteria discussed above. 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.
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