How To Pay Your Income Tax Installments?

Have you received an installment reminder from the Canada Revenue Agency (CRA) asking you to pay the tax due? Wondering what this reminder is about? Are you in trouble? Do you have to pay the tax immediately? Let’s understand how tax installments work. 

What are Income Tax Installments? 

The personal income tax is due from the day you earn the income. If you are an employee, your employer deducts a certain percentage as income tax from your salary and pays it on your behalf to the CRA. If you are receiving interest or some other income from a gig work, the payor deducts withholding tax and pays it to the CRA on your behalf. 

When no tax or insufficient tax is deducted or withheld at source, the CRA issues an instalment reminder to you, the taxpayer, asking you to clear your tax dues by the 15th of every quarter (March, June, September, December). If the due date falls on a weekend or a holiday, the CRA considers the next business day as the due date. 

Receiving an installment reminder is common when your financial situation changes, you are self-employed, or you receive rental or investment income. When you pay this tax installment, the total tax you have to pay in April is reduced, as you can claim it on Line 47600 – Tax Paid by Instalments of your tax return. You can still claim tax credits, deductions, and other tax benefits in your annual tax filing. The CRA will refund the surplus if your total tax liability exceeds the installments paid. 

How Much Tax Installment Should You Pay

There are three methods of calculating your installment amount. 

• No-calculation option: The CRA has calculated the installment on your behalf using the previous two years’ tax liability– March and June instalments for the 2024 tax year are based on the 2022 tax liability and September and December instalments on the 2023 tax liability. You can pay the amount written in the reminder if your financial and employment situations are similar over long periods.
• The prior-year option: If your financial situation has changed from two years ago and is similar to last year, you can divide your previous year’s tax liability into four equal instalments and pay that amount. 
• The current-year option: You calculate your tax estimate based on your current year’s income if your employment or financial situation has recently changed.

Let us understand this better with an example. John is a pilot who lost his job in 2020 and did some gig work to earn a living. In July 2022, he rejoined as a pilot but at lower pay. 2023 he got a significant increment and is continuing with the same salary in 2024. Since his financial situation changed in 2023, he could use the prior year option, as his 2023 tax liability is likely similar to his 2024 tax liability. 

Do You Have to Pay Income Tax Installments? 

You must pay the tax installment if your annual tax liability in the current or previous two years was above $3,000. Failure to do so would attract interest on overdue taxes. Even if you don’t have money, you are better off taking a business loan and paying tax installments for the following reasons. 

• The CRA charges an interest rate of 10% per annum on overdue taxes in the June 2024 quarter. 
• This interest is compounded daily. 
• The CRA will impose a late payment penalty once the interest on late installment payments exceeds $1,000. 
• The interest and penalties charged on unpaid taxes are not deductible business expenses. 

How To Manage Your Income Tax Liability? 

The CRA uses interest charges to ensure compliance with tax payment rules. You don’t want to get into the 10% interest rate spiral and accumulate a significant tax liability. 

• If you are currently sitting with a tax installment reminder and don’t have sufficient funds, it is better to look for alternative sources of capital with lower interest rates. 
• If you are late on your March and June 2023 installments, you can reduce or eliminate your interest charges and penalties by overpaying your September and December installments. 
• 15th is the due date for paying the installment. You can pay the tax as and when you receive the money and put a stop to the daily compounding of interest charges. 
• You could also calculate your effective tax rate and set aside that amount from all taxable payments you receive. For instance, your effective tax rate is 20%, and you receive a $1,000 fee. You can keep the $200 in a separate account and only use the $800 after-tax payment for your personal use. 

The tax liability could shake your budget drastically and put you in a debt spiral. Hence, every taxpayer needs to do tax planning, which involves doing transactions considering their tax implications, claiming the tax benefits to reduce your tax liability, knowing your tax liability and accumulating funds beforehand to pay taxes regularly.

Contact DDL & Co. in the Niagara Region for Expert Tax Planning Advice

A skilled tax advisor can help you prepare a tax plan based on your unique situation. At DDL & Co., our tax experts can provide services to support your tax planning function, whether you need partial or complete support. To learn more about how DDL & Co. can provide you with tax planning expertise, contact us online or call us at 905-680-8669.