According to the Canada Revenue Agency (CRA), approximately 1.8 million individuals are required to pay income tax by instalments annually. But, still, too many self-employed people make the assumption that they don’t really have to pay. They ignore their accountant’s formal letter. They ignore the CRA’s reminders. Until they learn the hard way and have to pay interest. So on that note, what sets off the need to make tax instalments?
If you are self-employed, either a sole-proprietor or a small business owner, you will have to pay personal tax by instalments if your net tax owing is more than $3,000 and it was more than $3,000 in either of the two previous calendar years (ex: 2021 and in either 2020 or 2019). These instalments are payments you make throughout the year to cover the taxes you normally would pay in one lump sum on April 30 of the following year.
Your personal tax instalment payments are due by:
- March 15
- June 15
- September 15
- December 15
The first year that you owe more than $3,000 at tax time, you enter ‘instalment land’. Your accountant will give you a formal letter informing you after your taxes are filed in the springtime. Don’t ignore this letter! The CRA will expect you to make instalment prepayments, beginning on September 15.
For example, say you’ve had a great year and you owe $5,000 in personal tax on April 30, 2021. This is your transition year. On September 15 2021 you will make a prepayment of $2,500, and then the second prepayment of $2,500 on December 15, 2021. But, then on March 15, 2022 (before your 2021 tax return is done), you’ll owe $1,250 as the first instalment for your 2022 personal taxes. Your second quarterly payment will be due June 15, 2022, the third instalment due on September 15, 2022, and the fourth payment of your 2022 taxes will be on December 15, 2022. These amounts depend on your 2021 tax return balance.
The CRA determines the number of your instalment payments based on the information from your latest assessed tax return. You will be mailed instalment reminders, but you don’t have to pay the instalments that they suggest, as those are always based on a ‘no calculation option. You can choose to not prepay if you’re sure you’re not going to owe anything, but if you do, expect to be charged interest.
You have three options to calculate your instalment payments:
No calculation option
This option only works for those who expect their income to stay the same from year to year.
This option is best if your 2021 income will be similar to what it was in 2020, but quite a bit different from 2019. For example, this option would make sense if your business has actually been thriving during pandemic times, doing much better than it was before the coronavirus came a-knockin’. You can determine the amount of your instalment payments based on the information on your 2020 tax return.
Is your business growing every year? This option is best if your 2021 income will be considerably different from 2020 and 2019. You can determine the amount of your instalment payments based on your estimated current year. Use the calculation chart for 2021 instalment payments (PDF) to help figure out the total instalment amount due. If you don’t make your full payments by the 2021 due dates, or your estimated amounts are too low, the CRA will charge you interest.
If your GST/HST remittance is under $3,000 for the year, you can pay the entire bill once a year when you file your GST/HST return. But if you file your returns annually and make up to $1,500,000 in sales, you are expected to pay the GST/HST in four quarterly instalments and not wait until the end of the calendar year. These payments are due month four for Q1 (April 30), month seven for Q2 (July 31), month 10 for Q3 (October 31) and month 13 for Q4 (January 31). Each payment is calculated as one-quarter of what you owed last year.
Expected instalments are based on the prior year’s GST/HST remittance, divided into four equal payments. For example, if you paid $4,000 in total GST/HST last year, your instalment payments the next year would be set at $1,000 each. But, business was great! You now owe $5,000, but you’ve prepaid $4,000, so you still owe $1,000 at the end of March when you file. Then on April 30, you’re expected to pay $1,250 for the first quarter, because the latest remittance was $5,000 not $4,000 like the year prior.
This is where a good accountant really helps with careful financial management. They would let you know that if you’re going to be earning more than the previous year, you should increase your instalments voluntarily so that you won’t have such a large amount of taxes owing when you file. Some people get trapped by not having a high-quality financial controller. They tend to think that just selling more will get rid of their problems, but those problems just snowball. No matter what, you need to pay the taxman. If you’re new to this level of business and it seems like rules keep changing, get yourself a business mentor, get yourself an accountant. You’re paying for the experience, and it’s worth it.
If you owed more than $3,000 on your last income tax return, you have to make instalment payments toward your tax bill for the next year. The exception is if your corporation is brand new because you don’t have to make instalment payments for a corporation until you have started your second year of operation. The required instalment payments are monthly and equal to the amount of the tax owing at the end of the previous tax year. For example, if your last taxes owing in the previous year were $4,000, your instalment payments would be $333.33 by the end of each month. Your due dates are dependent on when your business’ tax year begins. Canada’s CRA website shows examples of various instalment due dates for corporations with different tax years. Remember that if you have a balance owing at the end of the year you’ll be paying interest on any unpaid instalments dating back to the due date of the missed payments. Instalment interest is compounded daily at the prescribed interest rate, which is currently five percent for overdue taxes. Yikes. You can figure out your instalment payments online with the My Business Account instalment payment calculator.
Never ignore the formal letter from your accountant and those instalment reminders you receive in the mail. The government will charge you instalment interest. Make it easier on yourself by immediately putting all of those due dates in your calendar, so you can’t forget. You can pay your personal, GST/HST, and corporate taxes to the CRA through their ‘My Account’ or ‘My Business Account’ and if you haven’t signed up for those you can use your financial institution’s online banking app or website.