Most taxpayers with wage income in Canada do not need to pay personal income tax in advance because their employer deducts enough tax at source to cover the amount of tax due to them each payroll period. However, those who have taxable income from sources outside of their regular employment, including rental income, investment income, and income from self-employment ventures, often have no tax withheld or insufficient tax withheld during the year and will therefore owe tax when they file their individual tax returns the following year.
Similar to direct tax withholding by an employer in each payment period, instalment prepayment is a “tax liability paid in advance”. You pay tax to CRA at the same time you earn income throughout the year.
WHO NEEDS TO PAY TAX IN INSTALMENTS
All residents of Canada (except Quebec): If your net tax liability for the year exceeds $3,000, and if your net tax liability for any of the two years prior to the previous year exceeds $3,000, you must pay the current year’s income tax in instalments.
Residents of Quebec: If your net tax liability exceeds $1,800, you must pay the current year’s income tax in instalments.
DEADLINE FOR PAYMENT OF TAX INSTALMENT
All are due on the 15th of each quarter. The due dates listed by CRA are as follows:
March 15th
June 15th
September 15th
December 15th
If the due date for the instalment prepayment falls on a weekend or major holiday, CRA will consider the payment to be paid on time if it is received or stamped by CRA on or before the next business day.
TAX INSTALMENT REMINDER
CRA sends out instalment reminders in February and August each year to people who may need to pay their taxes in instalments. The February reminder is for payments made in March and June and the August reminder is for payments made in September and December.
You can also view your instalment reminder information online using CRA My Account.
CALCULATION OF TAX INSTALMENT
CRA reminder letter provides three options that can be used to determine how much you need to pay each quarter. Taxpayers can choose the lowest payment option depending on their situation.
NO-CALCULATION OPTION
CRA will determine the amount of your tax instalment based on information from your latest tax assessment. Just pay the amount and date on the reminder letter sent to you.
PRIOR-YEAR OPTION
Determine the amount of your instalment for the year based on the net tax you owe for the 2021 tax year and make four quarterly prepayments to CRA. If you pay the entire amount by the due date, CRA will not charge interest or penalties on the instalments.
CURRENT-YEAR OPTION
Determine the amount of your instalment based on your current year 2022 estimate and prepay CRA in four quarterly instalments. Using this option can also result in interest or penalties if you underestimate your current year tax and underpay your tax instalment.
INTEREST ON TAX INSTALMENT
If you fail to make a payment, make a late payment, or make a payment that is less than the amount you are required to pay, then CRA will collect interest on all late or insufficient instalments for prepaid tax. Interest on instalments is compounded daily at the statutory interest rate issued by CRA. The interest rate varies quarterly and is currently 5% for overdue tax payments.
How to calculate interest on tax instalment
A – Interest for the year based on the tax instalment payable for each period
B – Interest for the year based on actual tax instalment paid for each period
The interest you owe on the prepaid tax is the difference between A and B (if the difference is greater than $25).
TAX INSTALMENT PENALTY
This penalty applies only if your tax instalment interest is more than $1,000.
The penalty is calculated as: the tax instalment interest minus the penalty base and divide by 2 to get the tax instalment penalty.
(*penalty base – the higher of $1,000 or 25% of the tax instalment interest)
HOW TO REDUCE THE INTEREST AND PENALTY ON TAX INSTALMENT
CRA offers the following two options:
- Quarterly overpayment of tax instalment
- Quarterly prepayment of tax instalment
Overpaying and prepaying will allow you to earn interest on the tax instalment. However, this interest is non-refundable and can only be used to offset the interest and penalties on tax instalment incurred in the same tax year.
TAX INSTALMENT PAYMENT METHODS
Each instalment reminder sent by CRA includes two copies of Form INNS3, the Instalment Remittance Form. If you need more copies, you can download them from the CRA website. There are three options for tax instalment payments:
Electronic Payment – There are now many different ways to make electronic payments to CRA. These include My Payment online, online banking, and payment through a My Account pre-authorized checking account.
Financial Institutions – You can pay instalments at a branch of a Canadian chartered bank or credit union. You must have the CRA form INNS3 in order for the institution to accept the payment. Give the INNS3 form to the bank teller who will tear off and save the payment portion of the form and stamp the rest of it for you as a receipt.
By mail – You can send a cheque or money order, along with the completed INNS3 form to CRA. Note – Please include your Social Insurance Number (SIN) on the back of the cheque or money order so that CRA can process your payment correctly.