This page applies to individuals, Canadian residents of all provinces, except Quebec.
You may have to pay tax by instalments if your income does not have enough tax withheld at source.
What is a tax instalment?
Generally, when you file your tax return in April each year, you are paying the tax owed on the income earned in the previous year.
When required, the instalment is a request of advance payment of the taxes owed for the current year, to be paid in the current year, instead of being paid in April of the following year.
Whatever you pay in tax instalments in the current year, is deducted from the amount owed, which will be known when you file your tax return in the following year. If you paid too much instalments, you will receive a refund for the difference.
Do you need to pay tax by instalments for the current year?
You will need to pay tax by instalments for the current year only if:
Your estimated tax owed for the current year is over $3,000 AND
Your net tax owing in either of the previous two years was also more than $3,000.
For more clarity, "current year" in the example above, refers to the year that has started, so you do not know for sure at this point how much your taxes owed for this year will be and, for that reason, you will need make an estimate to find out if you need to pay instalments or not.
At the beginning of each year, the CRA sends reminders to individuals that may need to pay instalments. If you received the reminder, but your net tax owing will be $3,000 or less, you do not have to pay tax instalments for the current year. Both of the statements above need to hold true for you to be required to pay instalments.
Instalments due dates
The due dates are:
March 15th
June 15th
September 15th
December 15th
How much do you need to pay?
The amount of instalments that you need to pay will be the lesser of these 3 options:
Option 1: Prior year option
For this option, simply divide your net tax owed for the prior year by 4. This is going to be the required quarterly instalment.
However, you may not know your net tax owed for the prior year before March 15th, which is the due date for the first instalment.
To be able to use this option, you will need to calculate your tax owed before March 15th or make an estimate.
Option 2: Current-year option
For this option, you will need to estimate how much your net tax owed for the current year will be and divide it by 4 to get your quarterly instalment.
Option 3: No-calculation option
This is the option the CRA uses to prepare and mail the annual instalment reminders.
Since the CRA does not have enough information to use the first two options, they use the information they have, which is the net tax owed from two years ago for the first two instalments, and the net tax owed from the prior year for the last two instalments.
Example:
It is March 2024.
2023 net tax owed: Not know yet.
2022 net tax owed: $5,000
Calculation: $5,000 divided by 4 = $1,250 each instalment for March and June 2024.
By June, the CRA will know how much your net tax owed for 2023 was because you would have likely filed it by then. So, the second reminder is sent based on:
2023 net tax owed: $8,000 (example)
You have paid 2 instalments of $1250 each totaling $2,500
Calculation: $8,000 - $2,500 = $2,750 (This will be your instalment for September and December 2024).
Although this option requires more calculations, it is called No-calculation option, because you do not need to do the calculation. All you need to do, is to pay the amount the CRA calculated and informed you in the instalment reminder.
Conclusion
Using the No-calculation option can be the easier one because it does not require the individual to do any calculation, but it may not be the most advantageous one.
If you decide to not use the No-calculation option, you are responsible for doing the calculations for options 1 or 2 and decide with one to use.
Lastly, remember that you have the right to use the calculation that requires the lowest amount of instalments, but, if you estimate that your net tax for the current year will be low (to result in a lower instalment requirement) and it ends up being higher than what you estimated, the CRA will assess interest on the difference. (The amount that you paid versus the amount that you should have paid).
Disclosure:
The purpose of this document is for educational purposes. Always check with the CRA the current rules for tax instalment requirements. Source document:
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