Income tax instalments

Instalments for individuals

You may be required to prepay your tax through quarterly instalments (due on March 15, June 15, Sept 15 and Dec 15). Instalments are required if the difference between your combined federal and provincial tax and the amount of tax actually withheld at source was greater than $3,000 in 2014 or 2015 and will be greater than $3,000 in 2016. This last test requires an estimate in advance of the actual calculation of 2016 tax.

You can choose from three options to calculate the amount of your instalment. Under the first two options, you can base your instalments on your 2015 tax or on your estimate of your 2016 tax. If you choose the latter option, be careful. Underestimating your 2016 tax means the CRA will charge you interest based on the higher instalment required.

With the third option, the CRA calculates the amount of your instalment and sends you the calculation as a reminder. The total for the year will equal your prior year instalment base. The major advantage in paying the amounts shown on the CRA notices is that you won’t be charged any instalment interest if you pay on time. The CRA sends the instalment reminders in batches of two—in February for the March and June instalments, and in August for the September and December instalments.

Failing to remit the instalments on time can be costly. The CRA charges interest on the deficient amounts as if you owed the money and, if this interest charge adds up to more than $1,000, an additional charge is added. This can become quite expensive and should be avoided if possible.

Tax tip: If you discover during the year that you should have been making higher instalments, it’s possible to catch up because the CRA will credit interest on overpayments and apply that against interest deficiencies.

You can now use a pre-authorized payment plan to make your quarterly personal instalments. To do this, complete Form T1162A, attach a cheque marked “void” and return it to the CRA. This will authorize the CRA to automatically debit your bank account for a predetermined amount on a specified date.

Instalments for corporations

In general, your corporation is not required to make instalments if its total tax liability for the current or preceding taxation year is $3,000 or less. In this case, the amount owing is paid on the balance-due day for the taxation year. Again, there are three options for determining the monthly instalment amount. Under the first two options, you can base your corporation’s instalments on its “instalment base” for the immediately preceding year or on your estimate of its tax liability for the current year. If you choose the latter option, be careful. If you underestimate the amounts, the CRA will charge non-deductible interest on the underpayments.

Under the third option, the first two instalments can be calculated as 1/12 of the corporation’s instalment base for its second-last taxation year, and the next 10 instalments can be based on the corporation’s instalment base for the immediately preceding taxation year after deducting the first two instalments.

Each instalment is due on the last day of each month of the taxation year.

A Canadian-controlled private corporation that meets all of the following criteria will be able to make quarterly instalments:

  • The taxable income of the corporation and all associated corporations for either the current or previous year does not exceed the amount that qualifies for the small business deduction (see topic 24).
  • The corporation qualified for the small business deduction in either the current or previous year.
  • The taxable capital employed in Canada of the corporation and all associated corporations does not exceed $10 million in either the current or previous year.
  • The corporation has no compliance irregularities during the preceding 12 months.

As above, there are three similar methods for determining the quarterly instalment amounts. Each instalment will be due on the last day of each quarter of the corporation’s taxation year.

There are special rules in situations where a corporation has undergone a corporate reorganization or where the instalment base year was less than 365 days.