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 instalments are payable monthly, or quarterly for certain small Canadian-controlled private corporations. 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.
(Personal income tax instalments for March and June are based on two years back, so the CRA can send you a statement in February, before you have filed last year’s return, telling you how much you need to pay to ensure that 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.)
If you pay an instalment late, interest is charged for each day that your payment is late. As of the first quarter of 2023, the interest rate is currently 8% annual rate, compounded daily. This rate is the base commercial T‑Bill rate, rounded up to the next 1%, plus 4 percentage points. It is adjusted quarterly.
Normally, refunds owing to you from the CRA bear relatively low interest after 30 days, currently at 6% for individuals and 4% for corporations (compounded daily in each case).
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.
This offset interest is not simply CRA administrative policy. It is legally required by subsection 161(2.2) of the Income Tax Act and, for GST/HST, subsection 280(3) of the Excise Tax Act.
What this means is that, if your total “late payment” interest owing on late 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.