CRA Instalment Payments: Rules And Requirements

Answer

CRA instalment payments are periodic remittances made to the Canada Revenue Agency to cover income tax, GST/HST, and other amounts due throughout the year, rather than in one lump sum at the end. This system helps taxpayers, including KWB clients, manage their cash flow and avoid a large tax bill at year-end, particularly for those with income not subject to source deductions.

CRA Instalment Payments for Individuals: Who Needs to Pay?

To avoid interest charges, you have to pay tax instalments to Canada Revenue Agency (CRA) if your net tax owing in either of the two previous years was more than $3,000. This can happen if your income does not have the appropriate amount of tax withheld, or if you are self-employed, have rental or investment income, certain pension payments, or have income from more than one job.

CRA will notify you if you have to pay tax instalments. You will receive a reminder in February for March and June payments, and in August for September and December payments. Instalment reminders can also be found in My Account.

Instalment interest and possible penalty charges will be applied if you do not pay your required tax instalments, or if you have paid insufficient amounts.

You will be charged instalment interest if all the following apply:

• You are required to pay instalments.
• You received an instalment reminder that shows an amount to pay
• You did not make your full instalment payment on time

 

Instalment interest is compounded daily at the prescribed interest rate, which can change every three months. The rate for the 4^th quarter of 2023 is 9%.

You will also have to pay a penalty if your instalment interest charges are more than $1000.

To calculate the penalty, CRA determines which of the following amounts is higher:

1. A flat rate of $1000.
2. 25% of the calculated instalment interest you would have paid if you had not made instalment payments

 

CRA subtracts the higher amount from your actual instalment interest charges, and then divides the difference by two and the result is your penalty.

You can find more information on instalment interest and penalties for individuals here.

Scenario: Individual Tax Instalment Decision

Managing tax obligations can be complex, especially for those with variable income streams. Deciding whether to make instalment payments to the Canada Revenue Agency (CRA) is a financial planning step.

Arthur is concerned about having a large tax bill due at the end of the year, given his freelance income can vary significantly. He’s trying to determine if making regular CRA instalment payments throughout the year would simplify his financial planning and avoid potential penalties. He wonders if this proactive approach is the right move for his business.

Recommendation: Making CRA Instalment Payments

KWB would recommend making CRA instalment payments when income is unpredictable, as this can help manage cash flow and avoid a large lump-sum tax liability. This approach ensures consistent revenue distribution to the CRA throughout the year, potentially preventing penalties.

Required Tax Instalments for Corporations

Corporations have to pay their federal taxes in monthly or quarterly instalment payments. An instalment payment is a partial payment of the total amount of tax payable for the year.

For more information on instalment requirements based on different parts of the Income Tax Act, click here.

Now that instalment interest rates are fairly high, 9% in the 4^th quarter of 2023, it is even more important to pay the instalment payments required by CRA.

In the following cases, corporations do not have to pay instalments:

• New corporations in their first year of operation do not have to make instalment payments until the second year of operation. However, for the first year of operation, you have to pay any tax owed on or before your balance-due day for that tax year, typically 90 days after your year end date.
• You do not have to make instalment payments on your federal taxes if the total of your taxes payable is $3000 or less for either the current or previous year.
• You do not have to make an instalment payment for a tax year that is shorter than one month, or in the case of an eligible small Canadian controlled private corporation, shorter than one quarter.

 

Instalment interest is applied to corporations if late or insufficient instalment payments are made. When instalment interest is more than $1000, CRA will charge an instalment penalty.

The CRA calculate the penalty by subtracting from the instalment interest the greater of either:

• $1,000
• 25% of the instalment interest calculated if no instalment payment had been made for the year

One-half of the difference is the amount of the penalty.

Note that large corporations have a slightly different calculation of late or insufficient instalment interest, which can be found here.

Required Tax Instalments for Canadian Corporations

If you file your return late, a penalty applies. For corporations, the filing deadline is six months after the corporation year-end date. For individuals, your tax return is due April 30^th of the subsequent fiscal year.

For individual tax returns, the penalty is 5% of the unpaid tax that is due on the filing deadline, plus 1% of this unpaid tax for each complete month that the return is late, up to a maximum of 12 months. More information can be found here.

Prescribed rates

The Canada Revenue Agency (CRA) charges interest at prescribed annual interest rates to any amounts owed to the CRA. The CRA also pays interest on any amounts owed by the CRA to individuals and corporations.  CRA charges different prescribed rates depending on the type of payment owing to CRA, such as corporate tax payments, or overdue individual taxes.

For example, the prescribed rate for the period Oct 1, 2023 to December 31, 2023 on overdue taxes is 9%. If CRA owes you for over payments the interest rate applied will be 5% for corporations and 7% for non-corporations. Those rates are increasing by another 1% to 10%, 6% and 8% for the first quarter of 2024.

CRA prescribed interest rates are calculated on a quarterly basis and can be found here.