5 W’S OF TAX INSTALMENTS

”I always pay my taxes in full when they are due so why do I have to pay instalments?” is a commonly asked question.

Well, the simple answer…

When you have sources of income that don’t have taxes withheld, like being an employee receiving a paycheque, CRA wants to ensure that they are getting paid regularly so they require instalments when you owe taxes over a certain threshold. If you don’t pay the instalments and you owe tax at the time of your tax filing deadline/payment due date, they will charge you instalment interest. It is certainly your choice whether you pay instalments or not, but you need to know that CRA instalment interest is not deductible for tax purposes and with the interest they are charging these days, you definitely don’t want to be throwing any money away.

Now, I’m sure you know there are many types of taxes we pay in Canada which means there are many instalment types so let me break down a few of the more common ones being Personal Tax which could apply to every taxpayer in Canada and Corporate Tax, GST, and BC’s Employer Health Tax for Canada’s Small Businesses.

Personal Tax Instalments

Personal tax instalments are required when you owe more than $3,000 for the calendar tax year and are required quarterly on the 15th of March, June, September, and December of the same calendar year. So, your taxes owing for 2023 would have required instalments on the 15th of March, June, September, and December of 2023.

The instalment amount is generally based on your previous years taxes so what you owe for your 2023 personal taxes will be what you pay as instalments for your 2024 personal taxes.

There are 5 different options for calculating your personal tax instalments but CRA or your Accountant should provide you with a summary of your required instalment amounts and dates.

Corporate Tax Instalments

Corporate tax instalments are required when your federal taxes are greater than $3,000. The instalment payment is due the last day of every month or every quarter if you are an eligible small business (known as a CCPC) and they are paid based on the fiscal tax year. For example, if you have a December 31, 2023 year-end and pay quarterly, your instalments are due March 31, June 30, September 30 and December 31, 2023. As you can see, the instalment payments are made in the same fiscal tax year.

There are three ways to calculate corporate tax instalments.

1. Based on the estimated tax payable for the current year. This means that you would need to keep track of your taxable income throughout the year to ensure you are paying enough when the instalments are due. 
2. Based on the tax payable for the previous year. This is an easy one to calculate as you just take your taxes paid and divide by 4 or 12, depending on how frequently you are required or choosing to pay.
3. Based on the combination of the previous year and the year before the previous year. This one might be a bit more complicated, but CRA has online calculators which can help.

In my experience, option 2 is usually the best mainly because it is the easiest to calculate. Some small business clients, although eligible to pay quarterly, will also choose to pay monthly so it keeps their cash flow consistent month-to-month.

GST Instalments

When you file your GST return annually, instalments are required quarterly when the GST owing is greater than $3,000. The instalment payment dates differ slightly from corporate tax instalments in that they run one month after the tax year quarters. For example, if your tax year ends August 31, 2023, your instalment payments would have been due December 31, 2022, March 31, June 30 & September 30, 2023.

There are two ways to calculate GST instalments.

1. Based on the tax payable for the previous year. Again, an easy one to calculate as you just take your net GST tax owing and divide by 4.
2. Based on the estimated tax payable for the current year if you expect the GST to be less than the prior tax year.

Either one of these methods are good. Option 1 is easier and ensures you have paid the minimum required by CRA but if business has slowed down compared to the prior year, you might want to hold on to your cash and use option 2 instead. But remember, if business picks up near the end of the year, your instalments could end up being short and instalment interest might apply on the amount not paid. And like corporate tax instalments, if you want to keep cash flow consistent month-to-month, you can choose to pay monthly instead.

EHT Instalments (BC)

If you are a business in BC and your company payroll (or associated group of companies) for the calendar year is greater than $500,000, you are required to pay instalments when your EHT owing is greater than $2,925.

I digress briefly but what an interesting threshold amount?!? Curious to know who sets these targets?!? 😉

The instalment due dates are June 15, September 15, and December 15 of the current calendar year with the balance owing on March 31 of the following year. For example, if your calendar year ends on December 31, 2023, the EHT instalments would have been due on June 15, September 15, and December 15, 2023, with the final balance due on March 31, 2024.

The quarterly instalment is calculated based on 25% of the lesser of:

• EHT paid for the previous calendar year and
• EHT estimate for the current calendar year.

If you are unsure of what your final payroll will be for the calendar year, you may want to consider basing the instalment on the previous calendar year, unless your payroll has dropped significantly.

Like I said before, paying instalments is your choice but with interest at an all-time high, paying your instalments might be a good idea. Remember, if your personal or business income drops significantly, you can always consider reducing your instalments although I suggest you check with your Accountant first. And keep in mind, if you overpay, I have no doubt you will be happy to receive the refund.

***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.