Have You Made Your Tax Instalments This Year?

You may be a self-employed person, and if you end up owing more than $3,000 in income taxes, then you will have to make instalments the next year. Other than the self-employed person who has no tax taken off their income during the year, there are reasons why you may owe tax come April 30^th. This can happen if you earn income from rentals, investments, certain pension payments, or income from more than one job. If you have more than one job, you are only allowed to claim your exemptions on one job; the other jobs you should claim zero (0).

There are two factors to consider when determining if you have to pay tax by instalments: 1) your net tax owing; 2) your province or territory of residence.

You have to pay your income tax by instalments for 2017 if both of the following apply:

• your net tax owing for 2017 will be above the threshold for your province or territory ($1,800 or $3,000)
• your net tax owing in either 2016 or 2015 was above the threshold for your province or territory

You do not have to pay your income tax by instalments for 2017 if your net tax owing for 2017 will be $3,000 or less ($1,800 or less for residents of Quebec), even if you received an instalment reminder in 2017.

If you received an instalment reminder that shows an amount to pay, you may have to pay your income tax by instalments.

If your main source of income in 2017 is self-employment income from farming or fishing, you must make an instalment payment if both of the following apply:

• your net tax owing for 2017 will be above the threshold for your province or territory ($1,800 or $3,000)
• your net tax owing for 2016 and 2015 was above the threshold for your province or territory ($1,800 or $3,000)

Your province or territory of residence will determine the threshold of net tax owing you will use when determining if you have to pay tax by instalments. If you live in Quebec on December 31 of a year, use a limit of $1,800 of net tax owing. If you live in any other province or territory on December 31 of a year, use a limit of $3,000 of net tax owing.

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.

CRA sends instalment reminders to people who may have 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

If you only received an August reminder, and the reminder does not mention a March or June 2017 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 2016 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 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.

If you received an instalment reminder and you are required to pay instalments but do not comply, you may have interest and penalty charges.

You can also see your instalment reminders online using My Account.

Instalment interest and penalty charges

You will be charged interest if all of the following conditions apply:

• CRA sends you an instalment reminder in 2017 that shows an amount to pay
• you must pay by instalment in 2017
• you did not make instalment payments, or you made payments that were late or you paid less than what you had to pay

CRA charges instalment interest on all late or insufficient instalment payments. Instalment interest is compounded daily at the prescribed interest rate, which can change every three months.

How does CRA determine the interest?

1. CRA calculates interest on each instalment payment that you should have paid from the day it was due to your balance due date based on the payment option that results in the least amount of interest.
2. CRA calculates the interest on each instalment you paid for the year starting from the later of the date the payment was made or January 1 up to the balance due date.

Then, they determine the interest you owe by charging the difference between a. and b., if the difference is more than $25.

Instalment penalty

You may have to pay a penalty if your instalment payments are late or less than the required amount. CRA applies this penalty only if your instalment interest charges for 2017 are more than $1,000.

To calculate the penalty, CRA determines which of the following amounts is higher:

• $1,000
  or
• 25% of the instalment interest that you would have had to pay if you had not made instalment payments for 2017

Then, CRA subtracts the higher amount from your actual instalment interest charges for 2017. Finally, CRA divides the difference by two and the result is your penalty.

As you can see, it is definitely worth it to make your instalment payments if you get any kind of instalment reminder from CRA. If it’s your first year being self-employed, and you know you’ll owe more than $3,000 come February, for the following year you’ll want to make those instalment payments in March/June/September/December. In the end, paying by instalments does relieve you of that huge bill come April 30^th.