Mastering CRA Tax Instalments: A Guide for Business Owners
At Bright Line CPA, we often receive questions from our clients about tax instalments. This is one of the more complex aspects of Canada's tax system, where the onus is on the taxpayer to ensure sufficient instalments are made throughout the year. Failure to comply can lead to significant interest and penalties, especially for business owners managing multiple accounts.
In this blog we’ll focus on federal rules, excluding specific regulations from Revenu Quebec and provinces using a combination of GST & PST.
Who Is Required to Make Tax Instalments?
Individuals:
You'll need to make quarterly tax instalments in a given tax year if:
Your net tax in either of the previous two tax years (i.e. if looking at whether you need to pay instalments in 2024, look at net tax from 2023 or 2022 tax filings) was over $3,000;
You anticipate your net tax owing for the tax year will exceed $3,000.
Corporations:
Most corporations will need to pay monthly tax instalments unless:
Their tax payable for the year is less than $3,000;
Their tax year is shorter than standard durations specified for Canadian-controlled private corporations (CCPCs).
Certain corporations can opt for quarterly instalments if they:
Maintain a flawless compliance record over the past year;
Claimed a small business deduction recently;
Have taxable income of $500,000 or below and taxable capital in Canada of $10 million or less, inclusive of associated entities.
It is best to confirm your eligibility for quarterly corporate tax instalments with your accountant, as examining these criteria can be complicated.
For HST Registrants:
Annual GST/HST filers must make quarterly instalments if their net GST/HST from the prior year was $3,000 or more, with specific rules for first-time filers.
Calculating Your Tax Instalments: A How-To Guide
For Individuals:
The CRA bases your tax instalments on the most recently assessed tax return. Given that instalments are typically calculated at the beginning of the next tax year, before tax filing season has begun, this will often mean they are using the one from two years ago (ie for 2024 instalments, they would look at the 2022 return. However, you can adjust based on your prior year return if it is filed early enough or estimate your instalments based on expected changes in the current year.
For Corporations:
Corporations don't receive installment reminders from CRA and have three ways to calculate their instalments:
Use 1/12 of the estimated tax for the current year;
Base it on 1/12 of the previous year's tax;
Combine methods for the first two months of the year, then adjust for the remainder of the year (note this calculation can be complicated and is best handled by your accountant).
For GST/HST:
Calculate these instalments as either ¼ of the last year's net GST/HST or based on the estimated amount for the current year.
Navigating CRA Instalment Reminders
For Individuals:
CRA sends instalment reminders in February and August, often based on the previous tax year's data. If you've adjusted your instalments based on newer estimates, you may disregard these notices. Corporations receive no such reminders.
Making Your Tax Instalment Payments: Tips and Timelines
For any payment exceeding $10,000, electronic submission is mandatory. Make sure that you're aware of your payment method's processing time to avoid delays. Individuals should adhere to the quarterly due dates of the 15th of March, June, September, and December, with adjustments for weekends or holidays. Corporations have their specific monthly deadlines, with variances for those with non-standard tax years.
Interest on Insufficient Instalments
It's crucial to understand the implications of not making sufficient tax instalment payments. If your payments are less than the required amount, you may be charged interest on the shortfall. This interest is calculated from the due date of each instalment until the date the full payment is made. The interest rate is determined by the tax authority and can change periodically. To avoid these charges, ensure your instalments accurately reflect your anticipated tax liability for the year.
Impact on Year-End Tax Filings
Many taxpayers wonder how instalment payments affect their year-end tax filings. Essentially, these payments are prepayments of your expected tax liability for the current year. When you file your annual tax return, your instalment payments will be credited against the total taxes owed. If your instalments exceed your actual tax liability, you will receive a refund for the difference. Conversely, if they fall short, you will owe the remaining balance, potentially with additional interest and penalties. It's important to estimate your tax liability as accurately as possible to minimize discrepancies at year-end.
Proactive Strategies for Managing Tax
To avoid missteps:
Engage in regular tax planning meetings with your accountant;
Keep your bookkeeping precise and current;
Use automatic payments or set reminders for installment dates;
Allocate a portion of customer payments to a savings account designated for tax instalments.
Conclusion: Mastering Tax Instalment Planning
Effective tax instalment planning is essential for minimizing potential interest and penalties. Regular updates to your bookkeeping and ongoing engagement with your CPA can significantly aid in this process.