Do you own a corporation in Canada? Do you understand the corporate tax instalment policy? This article will provide you with information about corporate income tax instalments to help you avoid unnecessary interest and penalties.
WHAT IS THE CORPORATE TAX INSTALMENT POLICY
Generally speaking, companies must pay their taxes in instalments, rather than in a lump sum annually. Corporations (large or small) are required to pay corporate tax on a monthly or quarterly basis. The Income Tax Act (ITA) requires companies to pay instalments so that they can receive the same treatment as taxpayers who deduct tax from their income at source.
Companies pay their taxes in instalments, which mean that the monthly or quarterly payments are due by a set date. This is part of the annual tax obligation. If the payment is overdue, the Canada Revenue Agency (CRA) will charge interest/penalties on the tax owed.
WHO IS NOT REQUIRED TO PAY TAX INSTALMENT
- New companies: You do not have to pay income tax instalments in the first year of your new business.
- No federal tax instalments are required if your net tax liability for the current or previous fiscal year is $3,000 or less. Similarly, you do not have to pay your provincial or territorial taxes in instalments if your total provincial or territorial taxes for the current or previous year are $3,000 or less.
- Shorter tax years: For tax years of less than one month, or less than one quarter for qualifying Canadian Controlled Small Private Corporation (CCPC), you do not need to pay in instalments.
QUARTERLY CORPORATE TAX INSTALMENTS
According to CRA regulation, your corporation (CCPC) is eligible to pay taxes in quarterly installments if it:
- Has a perfect compliance history and does not owe any taxes
- Has claimed a Small Business Deduction (SBD) for the current or prior year
- Has taxable income of no more than $500,000 for the current or prior tax year, and taxable capital of $10 million or less in Canada, together with any affiliates
If your corporation (CCPC) meets the eligibility criteria listed above, you may pay in quarterly instalments. The due date depends on the fiscal year of your business. For example, if your corporation’s fiscal year-end is December 31, then your quarterly instalment tax payment deadline for 2022 should be on: March 31, 2022, June 30, 2022, September 30, 2022, December 31, 2022
MONTHLY CORPORATE TAX INSTALMENTS
All companies can pay in monthly instalments. If you are unable to pay tax in quarterly instalments, you must pay tax on the last day of each month.
If a company does not qualify for quarterly instalments in a given tax year, you can continue to make instalments in the current quarter (when due) and then begin making monthly instalments.
HOW TO CALCULATE CORPORATE TAX INSTALMENT
(i) Quarterly installments: The amount of each quarterly instalment can be chosen from the following three options, and generally the option that is most advantageous to the company (i.e., the least amount to be paid) is chosen:
- One quarter of the estimated taxable amount for the current tax year (2022)
- One quarter of the taxable amount of the previous tax year (2021)
- First period: one quarter of the taxable amount of the tax year prior to the previous year (2020); the next three periods: the taxable amount of the previous tax year (2021) minus the first period of the current year, then multiplied by 1/3
For example, if you choose the second option and your taxable amount for 2021 is $60,000, the quarterly instalment for 2022 would be $15,000 (i.e., $60,000/4). You can also use the estimated tax for the current year for the first option to calculate, however, if there is a difference at the end of the year, CRA will charge interest on the difference.
(ii) Monthly instalments: The monthly payment amount can be chosen from the following three options:
- 1/12 of the estimated taxable amount for the current tax year (2022)
- 1/12 of the taxable amount of the previous tax year (2021)
- The first two periods: 1/12 of the taxable amount of the tax year prior to the previous year (2020); the last 10 periods: the taxable amount of the previous year (2021) minus the first two periods of the current year, then multiplied by 1/10
For example, if you choose the second option, for monthly instalments, you can divide last year’s tax by 12 and pay 1 / 12 at the end of each month. For the $60,000 example, you would pay $5,000 per month.
HOW TO PAY CORPORATE INSTALMENT TAX
Similar to GST/HST, payroll tax, you can pay your corporate income tax in instalments using any of the following methods:
- Online banking through your financial institution or in person at a branch.
- CRA My Payment Service using Visa Debit Card, Debit MasterCard, or Interac.
- My Business Account: Set up a pre-authorized debit to pay directly from your bank account.
- Use third-party service providers such as PaySimply and Plastiq (these providers may accept credit cards, PayPal, and/or Interac e-Transfer).
- Pay with cash or debit card at Canada Post. You will need a QR code.
- Cheque: Send a cheque to CRA with your personal remittance voucher
INTEREST AND PENALTIES ON LATE INSTALMENTS
The CRA charges interest at a set rate (currently 5%) on late or insufficient payments. Interest on the outstanding amount is compounded daily. In addition to interest on instalments, you may also have to pay penalties on instalments.
The company may also owe “interest on tax arrears” if the tax arrears are not paid within 2 months after the “tax year end date”, i.e. the end of the tax year. The CCPC is payable within 3 months of the end of the tax year.
FREQUENTLY ASKED QUESTIONS
WHAT HAPPENS IF I DON’T PAY MY INSTALMENT TAX?
Generally, if you owe money at the end of the year, you will be required to pay interest on any unpaid instalments from the due date of each instalment.
WHAT IF THE TOTAL AMOUNT OF INSTALMENT TAX REQUIRED BY CRA EXCEEDS THE AMOUNT I ACTUALLY OWE?
CRA will give you a refund if the total amount of your instalments for the year exceeds the amount you owe on your final tax bill.
For example, CRA requires tax instalments because you owed $4,800 in taxes the previous year. However, you estimate that you will only owe $2,400 this year, and then use your estimated amount and choose four instalments of $600 each. If your estimate is correct and you owe no tax at the end of the year, you will not have to pay interest on the instalments less than the required amount.
WHAT IF THE TOTAL AMOUNT OF INSTALMENTS REQUIRED BY CRA IS LESS THAN THE AMOUNT I ACTUALLY OWE?
If you have paid the required instalment amount, CRA will not charge you additional interest on the additional tax you owe. In other words, you only have to pay the lower of 1) the actual amount of tax owed or 2) the instalments required by CRA, and you will not be charged interest.
WHAT IS THE DEADLINE FOR COMPANIES TO FILE INCOME TAX RETURNS?
The tax filing date for companies is 6 months after the end of the fiscal year. This is different from the due date of the tax payable by the company 2 or 3 months after the end of the year.
ARE SOLE PROPRIETORS (SELF-EMPLOYED BUSINESSES) TAXED ON A QUARTERLY BASIS?
If your net tax for the previous year exceeds $3,000 ($1,800 in Quebec), you may have to pay tax on your business income in instalments. Personal income tax prepayments are due on March 15, June 15, September 15 and December 15.