Are you required to pay quarterly instalments?
You must pay instalments if the difference between your tax payable for the year — federal and provincial tax plus Canada Pension Plan premiums (including Quebec Pension Plan if you live in Quebec) — and amounts withheld at source is more than $3,000 in both the current year and either of the two preceding years.
For Quebec residents, since provincial tax is not collected by the Canada Revenue Agency, the threshold is $1,800 of federal tax instead of $3,000 total. There is a separate obligation to pay Quebec instalments to Revenu Québec.
Quarterly instalments are due on March 15, June 15, September 15 and December 15. You then settle up any balance owing by the following April 30.
There are three possible ways to calculate your instalment obligations. You can choose any one of the three, and will not be penalized provided you correctly follow one of them.
The First Method is for your total instalments, paid in four equal payments, to equal the tax (and CPP) owing for the year on your sources of income from which tax is not withheld. In other words, your instalments should equal the balance owing at the end of the year. Of course, if you are in business you might not know what your tax owing will be for the year until well after the end of the year!
The Second Method is for your quarterly instalments to equal the tax (and CPP) owing on your previous year’s sources of income for which tax was not withheld. In other words, take the balance you had to pay last year after deducting any source withholdings, and pay that amount over the year in instalments.
The First Method requires you to estimate your current year’s income. If you guess low, you can end up not paying enough instalments and be subject to interest and penalty. The Second Method lets you use the previous year’s income, but on March 15, when the first instalment is due, you might not yet have calculated your previous year’s total tax. For this reason, the Third Method was introduced.
Under the “no calculation” Third Method, your March and June instalments are each one-quarter of the total tax (and CPP) owing on income from which tax was not withheld for two years ago. Your total instalments for the year must still equal the total amount for one year ago, as with the Second Method. Therefore, the September and December instalments must be enough to reach this total.
The CRA will mail you a statement twice a year advising you of your quarterly instalment obligations under the “no calculation” Third Method.
David is self-employed as a consultant. His 2021 tax payable (combined federal/provincial plus CPP) was $20,000. His 2022 tax payable was $24,000. He expects his total 2023 tax bill will be around $27,000.
David should pay quarterly instalments on March 15, June 15, September 15 and December 15, 2023, totalling $24,000, his tax payable for the previous year. If he wishes, he may pay four instalments of $6,000 each (i.e., using the Second Method).
The CRA will advise David in February 2023, however, that his March and June payments should be $5,000 each — one-quarter of his 2021 tax payable, since his 2022 figures aren’t yet known. If he makes these payments, and then pays $7,000 on each of September 15 and December 15 (which the CRA will also advise him to do), he will have paid the required $24,000 and will have met his instalment obligations under the Third Method.
The $3,000 balance (assuming David’s estimate of income for 2023 turns out to be correct) will then be due on April 30, 2024, although his return need not be filed until June 15, 2024.
If instalments are paid on time and in the correct amount as per any of the three Methods, no interest or penalty is payable. If instalments are not made when required or are deficient, interest is assessed at the CRA’s current “prescribed rate” for late payments (currently 7%), compounded daily. All such interest is non-deductible.
You cannot earn interest by paying instalments early, but you can earn “contra-interest” at the same rate as applies to late payments, to offset interest that would otherwise be assessed on late instalments.
David, from the above example, does not make any instalment payments until June 15, 2023. On that day he makes a single payment of $15,000. He then makes a $2,000 payment on September 15, 2023, and a $7,000 payment on December 15, 2023.
David should not owe any interest on instalments, if the prescribed interest rate stays constant through 2023 (or goes only down). His June 15 payment can be thought of as three parts: $5,000 due in March, paid three months late; $5,000 paid on time; and $5,000 of the $7,000 not due until September, paid three months early. The payment that is early will generate “contra-interest” to offset the interest that David would otherwise have to pay due to his being late with his March payment.
If the interest owing on late instalments is greater than $1,000, you may be subject to an additional penalty of up to 50% of the interest.
So, the bottom line is — although you can decide which Method to choose, do make sure you make your instalment payments! If you are not sure which Method to use, just follow the instructions given by the CRA, and you will be using the Third Method.
See “Around the Courts” below for an example of a couple who got this wrong.
If you are assessed interest and/or penalty on late instalments, they can be cancelled only in limited circumstances under the CRA’s “Taxpayer Relief” guidelines. Grounds for waiver include:
- a serious illness or accident that prevented you from making a payment on time
- serious emotional or mental distress, such as caused by illness or death in the immediate family
- disasters such as a flood or fire
- civil disturbances or disruptions in public services
- CRA processing delays that resulted in you not being informed, within a reasonable time, how much was owing
- incorrect information that you received from the CRA
- severe financial hardship: inability to pay the total owing due to the amount of accrued interest.