Personal tax Instalments

It is that time of year! No, it is not Christmas or the Personal Income Tax deadline, but instead, it is when some of you will receive that request for Personal Tax Instalments.

Why is the Canada Revenue Agency (CRA) asking for Personal Tax Instalments? It comes down to how much income tax you paid on your prior year’s tax return. If the amount of taxes due were $3,000 or more ($1,800 in Quebec) then a little part of the Income Tax Act, gives the CRA the right to ask you to prepay towards your upcoming Personal Income Tax Return.

How does the CRA calculate my instalment payments? This calculation takes the prior year’s taxes due and does the following:

  • If this is the first year, the amount of last year’s taxes is divided into two equal payments due on September 15th and December 15th
  • For subsequent tax years, the amount of last year’s taxes is divided into four equal payments due on March 15, June 15, September 15, and December 15.

What happens if I don’t make the requested Tax Instalments? The CRA can charge you both an Instalment Penalty and Instalment Interest. And to add insult to injury, neither the Instalment Interest nor the Instalment Penalty are non-deductible on your upcoming tax return. The amount of these is calculated as follows:

  • The Instalment Interest is calculated from the due date of the instalment payment to the end of the calendar year.
  • The instalment penalty is charged if your instalment interest exceeds $1,000 and is quite steep, either higher than $1,000 or 25% of the instalment interest charged.

Is there a way around not making Personal Tax Instalments? This is done by bringing your taxable income below the level where the taxes due will be less than $3,000 for the upcoming year. How is this done? With the help of your dedicated accountant, tax planning might include the following:

  • RRSP Contribution will bring your income below the tax instalment level.
  • Operations of a small business that will have a tax loss within the year.
  • Inquiring about claiming employment expenses from your employer.

The above is just the start. We suggest you book an appointment with your dedicated accountant to receive suitable tax advice on reducing or eliminating the Personal Income Tax Instalments.

You can book your tax planning appointment by: