How do you calculate your installment payments?

By Randall Orser | Business Income Taxes

Now that you’ve determined you need to make installments to Canada Revenue Agency (CRA), how do you do that? Your installments are based on your net tax owing (what you owed on your tax return), any Canada Pension Plan (CPP) contributions payable on self-employment and other earnings, and any voluntary employment insurance (EI) premiums payable on self-employment and other eligible earnings. Once you know that information you can calculate your installments for the current year.

Calculation options

You have three options to choose from to calculate your instalment payments:

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 give the no-calculation option amount on the instalment reminders that CRA will send you. CRA determine the amount of your instalment payments based on the information in your latest assessed tax return.

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 tax return for the 2017 tax year. Use the Calculation chart for instalment payments for 2018 to help you calculate your total instalment amount due.

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 unless the total instalment amount due you have calculated is too low. For more information, see Instalment interest and penalty charges.

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. Use the Calculation chart for instalment payments for 2018 to help you calculate your total instalment amount due.

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 unless the amounts you estimated when calculating your total instalment amount due CRA too low. For more information, see Instalment interest and penalty charges.

By choosing the best option for you, you will not overpay your tax during the year or have a large amount of tax to pay when you file your tax return. You do not have to tell CRA which option you choose.

Instalment reminder received in August 2018

If you only received an instalment reminder in August and the reminder does not mention a March or June 2018 instalment payment, follow the instructions that apply to you:

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 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.

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.

You want to reduce or eliminate the amount of your instalment payments

You can reduce or eliminate the amount of your instalment payments if you reduce your net tax owing. You can do this by having tax withheld, or by increasing the amount of tax withheld, from the following types of income:

Income tax cannot be withheld from certain types of income, such as self-employment, investment, and rental income, and capital gains.

Example:

Hugh, a resident of Alberta, pays his tax by instalments. He decides to have more tax withheld from his income in 2018. His net tax owing has been $3,500 for several years, and he expects it will stay the same in 2018. In January 2018, Hugh gave his pension plan administrator a filled-out Form TD1 that stated he wants an extra $250 withheld each month from his pension income.

Hugh now estimates his net tax owing will be $500 for 2018. Based on his estimate, he does not have to make instalment payments in 2018 because his net tax owing will not be over $3,000 for 2018. Hugh would disregard the instalment reminders he gets for 2018.

It can be easy to calculate installments, as CRA does it for you for the most part. If you feel your income will be much different than the prior year, either up or down, then adjust your installments accordingly. Just remember that if CRA does send you a reminder, then you must make those payments, especially if your tax situation doesn’t change from last year.

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President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.