Being a self-employed business owner, or someone with rental or investment income, entails many responsibilities that employees don’t have. When running a business, you have to be aware of all your obligations as a business owner and fulfill them following the laws. Your duties towards the Canadian Revenue Agency (CRA) represent a good portion of these obligations.
This article will focus on the obligation that proved to be among the most complicated Canadian small business owners have toward the CRA — tax instalments. Keep reading and learn what instalment payments are, who pays them, how they’re calculated, when they’re due, and everything else you need to know about this subject.
The CRA taxes small businesses and individuals with rental and investment income based on their annual taxable income. Since this income typically varies from year to year or even month to month, calculating your taxes payable can be very complicated. So, the CRA requires businesses and some individuals to pay instalments of taxes payable based on an estimate.
To that end, tax or CRA instalments are payments you need to make to CRA throughout the year instead of making one lump payment on April 30 of the following year. The instalments are meant to cover the total taxes you will owe to the CRA during that year.
Several categories of Canadian businesses and individuals have to pay taxes in instalments. A quick rule of thumb to remember is that if you owed more than $3,000 on your last tax return ($1,800 for Quebec residents), then you are likely required to make tax instalments for the current year.
According to these rules, you may be subject to paying CRA instalments even if your business is seasonal or cyclical and your income greatly varies from month to month – the CRA assumes that your income, and therefore your tax is earned evenly over the year.
The net tax owing threshold you need to compare your taxes payable with is determined based on your location. Each province or territory in Canada determines the net tax owing threshold for its residents for the next year on December 31.
The CRA sends instalment reminders to everyone who’ll have to pay tax instalments twice a year. You may receive one of them in February — reminding you of your March and June payments, and the other in August — reminding you of your September and December payments. However, you should not use these CRA reminders as the only indication of whether you need to pay tax instalments. Rely on the rules we’ve outlined below instead.
Two factors influence your instalments calculation — the method you use to calculate instalments and feasible tax deductions.
You can use three ways to calculate your instalment payment amounts:
If you estimate your taxes to be less in the current year than what CRA has calculated, then you should pay the lessor amount. However, if you underestimated you instalments, you will be charged interest on the deficient instalments.
If you estimate your tax payable to be higher than what CRA has indicated your instalments should be, then you only have to pay the CRA calculated amounts.
Remember, if your estimated tax owing, after credits, is less than $3,000 ($1,800 in Quebec) then no instalments would be required.
The CRA has created a 2022 calculation chart for instalment payments you can use as a guide to help you calculate your total instalment amount due. You can find it on the Canadian Government’s official website.
If appropriate, you can reduce or eliminate your tax instalments for individuals by having more tax deducted or withheld from the following sources:
You need to pay your tax instalments four times a year in Canada by the following instalment due dates:
When due dates fall on non-working days like Saturday, Sunday, or CRA-recognized holidays, the CRA must receive your payment on the following business day. The Agency won’t consider you’ve paid on time otherwise.
You can pay your instalments in person, online, or by mail. All of these options have different processing times that you have to be mindful of in relation to listed due dates.
There are two groups of individuals to whom these instalment due dates do not apply:
If you receive an instalment reminder, and you don’t make the required tax instalment payments, or you don’t make the payments in due time, or if you pay insufficient amounts, you’ll be liable for interest and penalty charges.
The CRA compounds your instalment interest daily at the prescribed interest rate that can vary. The amount you’ll pay results from the difference between the interest on each instalment you should’ve paid and the interest on each instalment you’ve paid.
If your instalment interest charges for 2022 are higher than $1,000, you’ll have to pay an instalment penalty.
The penalty calculation is quite complex requiring multiple steps for the calculation.
Choose the greater of (a) or (b).
Subtract this amount from the total interest owing. Divide this result by 2. This is the penalty, which is then added to the interest owing. (see example below).
Just a reminder, that CRA interest and penalties are not deductible for calculating your taxable income.
You can reduce or eliminate your instalment interest or penalty charges if you overpay your next instalment or make your next instalment payment early.
Deficient Instalment Interest Penalty Calculation Example
For 2022, John made instalment payments that were less than what he should have paid. As a result, his actual instalment interest charges for 2022 is $2,500.
If John had not made any instalment payments in 2022, his instalment interest charges would have been $3,200.
To determine John’s penalty, we first calculate which rate is higher:
Since the flat rate ($1,000) is higher than the 25% calculation ($800), we use the flat rate to calculate John’s penalty:
Now you divide the $1,500 by 2. John’s instalment penalty would be $750.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns. We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.
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