As a REALTOR® income tax may not be withheld from your pay. If not, or if an insufficient amount has been withheld, and your net tax payable in the previous year was $3,000 or more, you may be required to prepay your income tax through quarterly instalments. Failure to do so may result in costly interest and penalty charges.
Instalment payments are due four times in any calendar year: on or before March 15, June 15, September 15, and December 15. However, the first year you receive an instalment reminder it will likely only occur on assessment and will refer to the September and December instalments, which will account for the full year’s requirement.
You have three options for making instalment payments:
- The no calculation option basically requires you to pay the amount the Canadian Revenue Agency (CRA) determines and notifies you of in a reminder for September 15 and December 15 for the first year (or the four quarterly instalment amounts in subsequent years).
- The prior year option allows you to calculate your net tax owing for the previous year, add Canada Pension Plan (CPP) contributions payable, add any voluntary Employment Insurance (EI) premiums payable, and pay instalments of three quarters of the calculated total on September 15 and one quarter on December 15 for the first year of instalment payments.
- The current year option allows you to estimate your net tax payable for the current year, add CPP and EI as above, and remit three quarters and one quarter on the appropriate due dates (or quarterly instalments in any future year), based on your best estimate.
No matter the option you choose, if a payment has been made in March or June, it can be deducted from the other required instalment payments.
The current year option is particularly relevant for individuals who receive instalment reminders and know that their income for the current year will be far below what CRA is requesting in your instalment reminder. Under such circumstances where cash flow is well below the instalment requirement, the current year option allows you to estimate your taxes payable and pay on the basis of that estimate. However, your estimate has to be right. An incorrect estimate will subject you to interest charges from the date of the insufficient instalment on the difference between what your estimate was and the amount required. The current year option is of significant benefit to those who are certain of what their year’s income prospects will be. However, the risk of this option is that if in the course of the year there is some unforeseen taxable income gain, it will impact your estimate and interest on insufficient instalments will arise.
If requested instalments are more than you end up owing, you will get a refund of the difference or it will be credited to your next year’s instalments.
If requested instalments are less than you end up owing, there will be no interest charged on the deficient amounts if you complied with the instalment reminder as calculated by CRA.
Example:
CRA is asking for quarterly instalments of $10,000, because in the last two years you owed $40,000 in tax.
You know this will be a slow year. Business is down and you project your income tax liability to be $20,000, including CPP and EI, for this forthcoming year. You need not declare what option you are taking but you decide to remit quarterly payments of $5,000.
Your tax bill from the year ends up at $22,000. You end up with deficient instalments over the year of $2,000 and will be charged interest based on that deficiency for the year.
While interest charges for deficient instalments are payable at the prescribed interest rate (which changes every three months) dating back to the due date of the missed or deficient payment, penalties may be applied if the instalment interest charges for the year are more than $1,000.
Need more information? A good place to start is CRA’s publication, “Paying Your Income Tax by Instalments.”
The article above is for information purposes and is not legal advice or a substitute for legal counsel.
