Do You Have to Make Income Tax Installments?

There comes a time in many taxpayers lives where you end up owing too much to the taxman and have to make installments. Or, you’re now self-employed and no tax is taken off your earnings. The taxman likes his cut and doesn’t want to wait for it either. If your amount owing come April 30^this more than $3,000 then you must make installments; except Quebec which is $1,800. And, now Canada Revenue Agency (CRA) is penalizing, plus interest, you when you don’t.

Generally, your net tax owing is the amount you owe on your income tax and benefit return. You have to pay your income tax by instalments for 2018 if bothof the following apply:

your net tax owing for 2018 will be above the thresholdfor your province or territory ($1,800 or $3,000)

your net tax owing in either2017 or2016 was above the threshold for your province or territory

You do nothave to pay your income tax by instalments for 2018 if your net tax owing for 2018 will be $3,000 or less ($1,800 or less for residents of Quebec), even if you received an instalment reminder in 2018. If you received an instalment reminder that shows an amount to pay, you may have to pay your income tax by instalments.

What is an instalment reminder?

An instalment reminder is sent to help you determine if you have to pay income tax by instalments. The reminder will suggest an amount to pay and list the calculation options. There are three: no-calculation option, prior-year option, and current-year option.

No-calculation option

This option is best for you if your income, deductions, and credits stay about the same from year to year. CRA will provide the no-calculation option amount on the instalment reminders that they will send you. CRA determines the amount of your instalment payments based on the information in your income tax and benefit return for the two previous taxation years.

Prior-year option

This option is best for you if your 2018 income, deductions, and credits will be similar to your 2017 amount but significantly different from those in 2016. You determine the amount of your instalment payments based on the information from your income tax and benefit return for the 2017 tax year. 

If you use the prior-year option and make the payments in full by their 2018 due dates, CRA will not charge instalment interest or a penalty unlessthe total instalment amount due you have calculated is too low. 

Current-year option

This option is best for you if your 2018 income, deductions, and credits will be significantly different from those in 2017 and 2016. You determine the amount of your instalment payments based on your estimated current-year (2018) net tax owing, any CPP contributions payable, and any voluntary EI premiums. 

If you use the current-year option and make the payments in full by their 2018 due dates, CRA will not charge instalment interest or a penalty unlessthe amounts you estimated when calculating your total instalment amount due were too low. 

The CRA sends instalment reminders to people who mayhave to pay tax by instalments:

The February reminder is for the March and June payments

The August reminder is for the September and December payments

• No-calculation option– Pay the amount shown in box 2 of your reminder for September 15 and December 15.
• Prior-year option – Calculate your 2017 net tax owingand add any CPP contributions payable, and any voluntary EI premiums payable. Pay 75% of the total on September 15 and 25% on December 15.
• Current-year option– Estimate your current-year 2018 net tax owing and add any CPP contributions payable, and any voluntary EI premiums payable. Pay 75% of the total on September 15 and 25% on December 15.

If you received an instalment reminder and you were required to pay instalments but did not comply, you may have interest and penalty charges. I won’t get into that here, but it can be hefty depending on what your instalments should have been and what you actually paid.