With the 2021 tax return season in full swing, I want to remind you of the importance of paying personal tax instalments. The cost of ignoring your instalment obligations can be high.
Who has to make tax instalments?
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 years tax returns and will send instalment reminders to the taxpayer.
Two important points to note:
- You only have to make an instalment payment if the CRA sent you an instalment reminder; and
- If you are certain that your current year unpaid tax liability will not exceed $3,000 you are not required to make instalments.
When required, instalments are due on March 15, June 15, September 15, and December 15. 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 uses 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 equals your last year’s tax liability.
You also have the option of:
- Estimating current year’s tax and paying this amount; or
- Pay an amount equal to last 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 four per cent. Beyond the interest is a steep penalty if instalment interest for 2021 is more than $1,000.
To calculate the penalty, go with the higher amount of:
- $1,000; or
- 25 per cent of your instalment interest that would be payable if you had not made any instalment payments in 2021;
- Then, subtract the higher amount from the actual instalments interest charges for 2021. 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 the income earning purpose. 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.