A few short years ago making installment payments to Canada Revenue Agency (CRA) was a voluntary option, now they have become mandatory based on the criteria listed below.
CRA bases the calculation of whether or not you need to pay instalments on your last filed and previous year’s tax return filing. The amount of the instalments usually equal the last filed taxes paid so that it appears that you are paying your taxes in advance.
On CRA’s installment website, they are very clear about stating that you are paying the current year’s taxes while you are earning the income and are not paying it in advance.
How does CRA determine who pays installments?
If you have income and no tax has been withheld from that income or not enough tax has been withheld for at least 1 year, you may be required to pay your tax by instalments. This may happen if you have self employment income, rental or investment income.
The determining factors are the province in which you live and your net tax owing. If you live in Quebec, you would be required to pay instalments if your net tax owing is more than $1,800. For the rest of Canada, the net tax owing needs to be $3,000 and above.
However, if you know that your net tax owing for the year will be less than $3,000 you will not be required to pay installments. As for Farmers and Fishermen, they are required to make installment payments if they have any taxable income.
How are installments calculated?
The instalments are usually calculated on a quarterly basis – March, June, September and December. If you miss one quarter, you can always pay it late or double up on the next quarter.
Normally CRA will send out an installment reminder twice a year to any taxpayers that are required to pay installments. At that point you will need to make a decision as to whether you will make the installment payment or if you want to wait until the end of the year and possibly incur installment interest and penalties if your net tax payable does go over the $3,000 threshold for a second year.
Does CRA charge late fees?
The interest is compounded daily at the CRA prescribed interest rate and is charged on late and insufficient payments. If your interest charges are more than $1,000, you may also be required to pay an installment penalty.
If you have a gst account
Note that if you have a (Goods and Services Tax) GST account and are an annual remitter, you will also be required to pay your GST by installments if your annual GST owing is $3,000 or more. One last note, don’t forget to report your installment payments on your GST return to avoid interest and penalties.