If you are required to pay the CRA personal or corporate instalments for income tax or GST/HST purposes, here is a useful tip that can simplify your payments. It is only worth considering if you have ample cash available and no concerns about running short of cash.
Personal income tax instalments are payable quarterly. Corporate tax installments are payable monthly. GST/HST instalments, if you are a registrant that files GST/HST returns annually, are payable quarterly. Instalments are normally based on your previous year’s tax, although if your current year’s tax is lower, you can use that figure instead.
If you pay an instalment late, interest is charged for each day that your payment is late. The interest rate is currently 5% annual rate, compounded daily. This rate has been basically unchanged since April 2009 (except for one quarter in 2013 when it was 6%). The rate is the base commercial T-Bill rate, rounded up to 1%, plus 4 percentage points. It is adjusted quarterly: see www.cra.gc.ca/interestrates for the current and past rates.
(Personal income tax instalments for March and June are based on two years back, so the CRA can send you a statement in February telling you how much you need to pay to ensure you won’t be charged interest. Your notice for September and December will then tell you how much to pay so that your total instalments for the year equal your last year’s tax.) Normally, refunds owing to you from the CRA bear only minimal interest after 30 days, of 3% for individuals and 1% for corporations.
However, if you pay an instalment early, the CRA will credit you with “offset interest” or “contra interest”, at the same high rate of interest that applies to your late payments. This “offset interest” is offset only against late instalments; it is never paid out to you.
What this means is that, if your total “late payment” interest on instalments matches your total “early payment” offset interest, the two will cancel each other out.
As a result, if you make a single payment at the midpoint of all your instalment obligations for the year, then provided the interest rate does not go down after mid-year (and at the current 5% it cannot go any lower), you will not be assessed any interest.
Example:
You report GST/HST using the calendar year. Your GST/HST net tax remittance last year was $20,000, and you expect to have a similar net tax total this year.
Normally you would be required to pay instalments of $5,000 one month after the end of each quarter, i.e, on April 30, July 31, October 31 and January 31.
Instead, however, you make a single GST/HST instalment payment, covering the entire year, of $20,000. You make this payment before September 15, which is the midpoint of your four instalment due dates.
The CRA will calculate late-instalment interest for the April and July instalments, but will offset that interest with the “contra” interest earned from your early payment of the October and January instalments. The net result will be that you have no interest owing.
As noted above, you should not postpone your instalments unless you are sure you will have the $20,000 available in September to make the single instalment payment. If you do, however, you might find that this simplifies the amount of attention you have to devote to paying tax instalments.