You may not be aware that you or your business are required to remit quarterly or monthly tax instalments to CRA. And it is likely that if the instalments are not made, you will be charged interest and penalties
Goods and services tax instalments
You are required to pay GST instalments if your net tax (GST owing after ITC’s have been claimed against GST collected on sales) is $3,000 or higher on an annualized basis. The instalment amounts are calculated as 1/4th of your prior year net tax. Instalments payments are due within one month of the end of your fiscal quarters.
CRA does allow you to make instalments based on what you estimate your net tax to be for the current year; however they caution that if the payments are less then what you should have paid, you will be charged interest on the difference.
Interest equal to the posted basic rate of 1% plus 4%, will be charged on any overdue amounts, including late instalment payments.
Corporate federal tax instalments
This article deals with only instalments relating to part I and part V taxes as they are the most common for corporations.
Firstly, you are not required to make instalments if the total taxes payable on part I and part V are under $3,000. This threshold is applicable for both federal and provincial taxes payable.
New corporations are also not required to make instalment payments for the first year of operations. This excludes any part X11.1 tax.
There are three options used to calculate the monthly instalment base for the following period.
- Instalments based on your current year
- Instalments based on the prior year
- Instalments based on a combination of the two previous years
For all of the above calculations, the amount used is the total tax paid federally and provincially for part I and part V taxes
CRA assesses the above returns to determine which method results in the least amount of instalments payable. Instalments are due monthly, however; there is an exception to make quarterly payments if you meet the following criteria.
A small Canadian-controlled private corporation (CCPC) is eligible to make quarterly instalment payments if, at the time the payment is due:
- it has a perfect compliance history;
- it has claimed a small business deduction for the current or previous tax year;
- together with any associated corporations, for the current or previous tax year:
- it has taxable income of $500,000 or less; and
- it has taxable capital employed in Canada for the tax year of $10 million or less.
CRA consider you to have a perfect compliance history if, during the previous 12 months ending at the time your last instalment was due:
- the corporation remitted on time all the amounts required for GST/HST, withholding under subsection 153(1), Canada Pension Plan contributions and employment insurance premiums; and
- the corporation filed on time all returns required under the Income Tax Act or under Part IX of the Excise Tax Act (GST/HST).
Quarterly instalments are calculated the same as the instalment options shown above. CRA Online has an instalment payment calculator to calculate the instalment payments as well as the payment due dates on Represent a Client and My Business Account through the CRA website.
Interest is calculated on late or insufficient instalment payments based on the prescribed interest rate. For the final quarter of 2015, the prescribed interest rate is 5%
Personal income tax instalments
You are required to pay personal income instalments if your net tax owing is more than $3,000 for the current tax year and in either the first previous tax or second previous tax year. These instalments would be due quarterly.
Interest is currently at 5% based on the CRA prescribed rate. CRA will apply a separate penalty if your instalment interest for the current tax year is more than $1,000. To determine the penalty to be applied, the following formula is used:
CRA takes the higher of the following amounts
- 25% of the instalment interest charges if you did not make any instalment payments for the current tax year.
Whichever amount is higher is then subtracted from your actual instalment interest for the current year. The result is divided by two and the result is your penalty.
For the current tax year, Client A did not make all their instalment payments and was assessed with $2,000 in instalment interest charges. If Client A did not make any of his instalments, the interest charge would have been $3,000.
25% of the $3,000 is $ 750, so the $1,000 amount is used as it is higher.
$2,000 less $1,000 = $ 1,000
$1,000/2 = $ 500.00 penalty added to your amount owing
Total amount owing for current year is now $2,500.
The CRA has various online resources, including video segments, for determining instalment payments for corporate and personal taxes as well as GST.
CRA Instalment Resources
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Jean Dubois of KWB Chartered Accountants for providing this content.