Failure to Pay Tax Instalments Can be Costly | Sponsored by BDO’s Scott Conner

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Recently you may have received an instalment reminder from the CRA. Let’s review the importance of paying personal tax instalments.  The cost of ignoring your instalment obligations can be high.

Who has to make tax installments?

If your total tax liability, less the portion withheld at source, is greater than $3,000 for both the current year and either of the two preceding years, you must make instalments. The CRA determines who is required to pay instalments from prior tax returns and will send installment reminders to the taxpayer.  Two important points to note:

• Individual taxpayers only have to make an instalment payment if the CRA sent you an instalment reminder; and 
• If you are certain that your current year’s unpaid tax liability will not exceed $3,000, you are not required to make instalments.

Due dates

When required, instalments are due on the 15th day of March, June, September, and December.  The notices from the CRA will arrive in February and August.  They are also available in the CRA My Account online service.

How are they calculated?

• The CRA used the bases of the first two instalments for the year on your second preceding year’s tax liability.  The final two instalments are then adjusted so that the total of the four instalments equal your last year’s tax liability.

You also have the option of:

• Estimating the current year’s tax and paying this amount.
• Paying an amount equal to the late year’s tax.

There is no cost to overpaying your instalments.

If you fail to pay the required amounts on time?

First, there’s instalment interest calculated at the CRA’s prescribed rate, plus 4%.

Beyond the interest is a steep penalty if instalment interest for 2022 is more than $1,000.  To calculate the penalty, go with the higher amount of:

• $1,000; or
• 25% of your instalment interest that would be payable if you had not made any instalment payments in 2022.

Then, subtract the higher amount from the actual instalment interest charges for 2022.  Divide the amount by two to arrive at the penalty amount.

It’s advisable to pay all required instalments on time, even if you must borrow to do so. You can reduce or eliminate interest charges and penalties on late instalments by overpaying subsequent instalments or paying them before their due dates.  If you have a choice between borrowing to pay instalments and borrowing for business or other income-earning purposes, always use your cash to pay your instalments and borrow for income-earning purposes.  This will generally ensure that the interest is deductible.

Scott Conner is an experienced tax practitioner and practical problem solver at BDO. As a partner specializing in Canadian income tax, Scott has particular specialties in private companies, planning for estates, trusts, and complex transactions. As personal tax season approaches, Scott and his team understand personal taxes are as individual as clients themselves. BDO works closely with their clients to understand their specific needs and adjust strategies accordingly. BDO partners and staff take a proactive, hands-on approach. They closely follow existing and proposed legislation to determine how it will affect individual financial goals, and provide ongoing guidance.

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