A Guide to Canadian Tax Installments

In this blog post we will go over an in-depth explanation of tax installments for (1) individuals and (2) corporations. If you’re self-employed or incorporated, understanding tax installments is crucial. If you don’t make tax installment payments on time, you risk being charged interest and penalties by the CRA. 

Why Are Tax Installments Required?

The CRA requires individuals and corporations to make tax installment payments throughout the year because the government does not want to wait until the end of the year to collect the money you owe. This allows the government to make sure that it maintains a steady cash inflow of tax revenue and lowers the risk of non-payment.

In essence, tax installment payments put self-employed individuals and corporations in the same tax situation as employees.

If you’re an employee in Canada, you technically pay tax installments via your paycheque. This is because your employer deducts income tax on each paycheque. Then, at the end of the tax year, you perform a tax calculation on your tax return to determine if you owe more money in tax or if you will be getting a refund. When you get a tax refund, it means you overpaid income tax during the year. 

Other reasons why tax installments are required are that tax installments help businesses manage cash flow. Instead of paying a surprise large sum at the end of the year for tax, installments help a business pay taxes owing for the year throughout the year. This reduces the financial burden of paying a large tax amount at once. 

Canadian Tax Installments for Individuals

How do tax installments work for individuals?

Any individual who has taxes owing of over $3,000 for the current year or any of the previous two years is required to pay tax installments.

How are tax installments calculated for individuals?

Installments are calculated using three methods:

1. 1. CRA’s suggested amount: You simply pay the CRA’s suggested amounts in the installment reminder they send you
   2. Prior Year Option: You calculate your installments based on the taxes you paid last year
   3. Current Year Option: If your current year tax situation is different than last year, you can calculate your current year’s estimated tax owing

When are tax installments due for individuals?

Tax installments are due quarterly on the following dates:

• • • March 15
    • June 15
    • September 15
    • December 15

Canadian Tax Installments for Corporation

How do tax installments work for corporations?

Any corporation who has taxes owing of over $3,000 for the previous year is required to pay tax installments

How are tax installments calculated for corporations?

Installments are calculated using three methods:

1. 1. CRA’s suggested amount: You simply pay the CRA’s suggested amounts in the installment reminder they send you
   2. Prior Year Option: You calculate your installments based on the taxes you paid last year
      Example: If a corporation owed $12,000 last year in corporate tax, it would pay $3,000 quarterly or $1,000 monthly
   3.  Current Year Option: If your current year tax situation is different than last year, you can calculate your current year’s estimated tax owing

When are tax installments due for corporations?

Quarterly Corporate Tax Installments 

Canadian-Controlled Private Corporations (CCPCs) with a taxable income of $500,000 or less in the current or previous tax year can qualify for quarterly payments. To qualify:

• • • The corporation must have been a CCPC throughout the year
    • It must have had taxable income not exceeding the $500,000 threshold
    • The corporation’s or associated group’s total taxable capital employed in Canada should be $10 million or less

Quarterly Due Dates: 

Quarterly installments are generally due on the last day of each quarter:

• • • First Quarter: March 31
    • Second Quarter: June 30
    • Third Quarter: September 30
    • Fourth Quarter: December 31

Monthly Corporate Tax Installments 

Corporations that do not meet the criteria above, must pay monthly installments.

Monthly Due Dates: 

• • Monthly installments are due on the last day of each month.

What happens if I don’t pay my Tax installments?

When individuals or corporations fail to make their required tax installments, the CRA charges interest on unpaid or late installments.

Missed Or Late Tax Installments

The CRA charges interest on any unpaid tax installments for both individuals and corporations. 

This interest is calculated daily at the CRA’s prescribed rate. The interest rate for unpaid tax installments is typically higher than the rate the CRA pays on overpayments.

Calculation Formula:

• Interest is calculated daily on the outstanding balance for each installment period. The formula is: 

• Daily Interest Rate: Annual interest rate divided by 365.

Penalties on Tax Installments

In addition to interest, the CRA may impose penalties if your underpayment exceeds a certain threshold. This penalty is calculated as 50% of the difference between (1) the actual amount you paid and (2) the required installments.

What happens if overpaid pay my Tax installments?

The CRA typically issues refunds for overpaid installments unless there’s an outstanding balance from previous years. If you have an outstanding balance in previous years, the refund will go to repay this balance.

If that doesn’t apply to your situation, Individuals and corporate taxpayers can opt to have the overpayment applied to future installments or next year’s balance, which may help reduce the following year’s installment burden. In some cases, the CRA pays a small amount of interest on overpayments.

Do you need with your calculating your tax installments or have any questions? Let us help you. Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here.

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.