Many taxpayers hate giving their money early to the government, and so don’t make any kind of installments. Canada Revenue Agency (CRA) has realized this and now requires that taxpayers, and corporations, make installments on their various accounts. Generally, you have to make installments when your tax balance owing is more then $3,000 (except in Quebec where it’s $1,800) for the prior tax year.
You have to pay tax by installments for the same reason that most people have tax withheld from their income throughout the year. If you earn income that has no tax withheld or does not have enough tax withheld for more than one year, you may have to pay tax by installments. This can happen if you earn rental, investment, or self-employment income, certain pension payments, or income from more than one job. The $3,000 amount applies to your personal taxes, so if you owe more than that during the prior tax year, you will have to make installments.
If you are on pensions and you’re income is more than $20,000, then you should get something taken off each of the different pensions, such as OAS and CPP by calling Service Canada. For other pensions, call the pension office for that pension.
Also, if CRA has sent you an installment reminder letter, you must make the installments as per this letter, unless you believe your income will be less and you can arrange to make smaller, or no installments. If you believe your income will be more, then you can increase your installments based on what you believe will be your current income.
Along with your personal taxes, your business related taxes, such as your GST/HST or corporate taxes might require installments. It’s usually only these two accounts that need to do installments, as they are the ones that would be filed annually.
GST/HST is only paid by installments when you are an annual filer. You pay installments when you’re prior year balance owing was over $3,000. Again, if you think you’re going to owe less you can reduce your installments. Or increase them, if you think you’ll owe more than the prior year.
For sole proprietorships, you must pay your installments in April, July, October, and January of the following year. This is where doing your books quarterly at a minimum comes in. You can figure out what you owe for that quarter and remit that as your installment payment. In the following year when you file your annual return you’ll end up owing nothing.
For GST/HST, Corporations would follow their fiscal year and pay on a quarterly basis. For example, if your year-end were August 31st, then you’d pay quarterly installments in September, December, March, and June.
For a corporation’s income taxes, the installments are due monthly by the end of the month. Penalties and interest will apply on any missed or late installments or if you made no installment payments at all.
What if you don’t make your installment payments as required?
CRA charges installment interest if all of the following conditions apply:
- They send you an installment reminder in 2014 that shows an amount to pay;
- You are required to make installment payments in 2014; and
- You did not make installment payments, or you made payments that were late or less than the required amount.
CRA calculates the interest on each installment that you should have paid using the payment option that calculates the least amount of interest up to the balance due date. Then they calculate the interest on each installment you did pay for the year, starting from the later of the date the payment was made or January 1 up to the balance due date. They charge the difference between these two amounts if the difference is more than $25.
Installment interest is compounded daily at the prescribed interest rate.
You may have to pay a penalty if your installment payments are late or less than the required amount. CRA applies this penalty only if your installment interest charges for 2014 are more than $1,000.
To calculate the penalty, CRA determines which of the following amounts is higher:
- $1,000; or
- One-quarter of the installment interest that you would have had to pay if you had not made installment payments for 2014.
Then, they subtract the higher amount from your actual installment interest charges for 2014. Finally, they divide the difference by two and the result is your penalty.
Making sure that you pay your installment payments on time is very important these days. As well as knowing whether or not you have to make installment payments at all. If you’re unsure whether to make installment payments, talk to your accountant, bookkeeper or tax preparer.