Toronto Tax Lawyer’s Guide to Managing Tax Instalment Payments

INTRODUCTION – Personal Tax Instalment Payments

Most individuals pay income tax instalments regularly when tax is withheld from salary or wages by their employers and remitted to Canada Revenue Agency (CRA). The difficulty arises in the case of taxpayers who have little or no income tax withheld at the sources of their income, and who therefore have income tax payable when they file their returns. For most individuals in these situations, instalment calculations are done annually as part of their tax return. CRA will then send instalment reminder letters outlining a schedule for making quarterly payments towards their tax liability for the year. In a recent CBC article titled, “CRA shocks woman by asking her to pay tax on money she hasn’t yet earned,” a Nova Scotian post-secondary instructor was sent a letter requesting two income tax instalment payments totalling over $3,000 each. After initially believing the letter was a scam, the taxpayer was shocked when CRA confirmed that she was required to pay income tax instalments on money that she had not yet earned. This article will summarize what instalment payments are and who may be liable to pay them, what to do if you receive an instalment letter from CRA, and steps you can take to reduce instalment payments.

Background – What are Tax Instalment Payments and When are they Filed?

Personal tax instalment payments are quarterly payments made by taxpayers in advance of the filing deadline for the tax year. The CRA sends instalment reminders in February, for the March 15 and June 15 payment deadlines, and August, for the September 15 and December 15 payment deadlines. Each payment typically represents approximately one-quarter of the taxpayer’s estimated tax liability for the year. They allow CRA to collect income tax payable throughout the year, as opposed to lump sum collections at the date of filing. This system helps avoid aggressive collection tactics being used on smaller accounts. For taxpayers, this advance instalment system can be beneficial as it may be more practical to budget for lower quarterly payments as opposed to a much higher yearly payment.

Who is Required to Make Instalment Payments?

Regardless of a taxpayer’s preferences, certain individuals are required to make instalment payments. The two factors used to determine if a taxpayer must make instalment payments are their province or territory of residence, and their net tax owing for the tax year. For Ontario and other non-Quebec residents, the taxpayer must make instalment payments if their net tax owing for 2020 will be above $3,000, and their net tax owing in either 2019 or 2018 was also above $3,000. For Quebec, the threshold for net tax owing is $1,800. If your net tax owing for 2020 will be less than the threshold for your province or territory, then you may not need to pay by instalments, even if you received an instalment reminder in 2020. Generally, the taxpayers most often required to make instalment payments are self-employed individuals, individuals with multiple jobs, or individuals with rental and investment income, including recent retirees.

What to do if you receive an instalment letter

If you receive an instalment letter from CRA, you have three options.

• Pay instalment amounts calculated by CRA. In many cases, the instalment reminder letter will include CRA’s calculation of the taxpayer’s instalment payments, based on the information they have on file. If the taxpayer’s income, deductions, and credits are estimated to stay about the same in 2020 as in the previous two years, then CRA recommends the taxpayer pay the amounts calculated. If the taxpayer pays the calculated amounts, they will not be subject to interest or penalties if, upon filing, their tax liability is higher than estimated.
• Pay a reduced amount based on taxpayer’s estimates for net tax owing. The taxpayer would be required to estimate their own net tax owing for the year. The CRA offers two methods of estimating net tax owing for the year:
  • The prior-year option works best if the taxpayer’s 2020 income, deductions, and credits will be similar to 2019 but significantly different from 2018. This option uses information from the 2019 tax year to estimate 2020 net tax owing.
  • The current-year option works best if the taxpayer’s 2020 income, deductions, and credits will be significantly different from 2019 and 2018. The taxpayer in that situation therefore must estimate current-year net tax owing, any CPP contributions payable, and any voluntary EI premiums.

It is important to note that if the CRA includes a calculated amount in the instalment reminder, the taxpayer may be liable for interest and penalties for discrepancies between instalment payments made under these calculations and actual net tax owing at the end of the year.

Do not pay instalment payments. Taxpayers who do not expect to owe more than $3,000 (or $1,800 in Quebec) in tax for the year may not be required to make instalment payments. It is again important to note, as in the case with making reduced payments, taxpayers may be liable for interest and penalties if they owe more than $3,000 net tax on filing. However, CRA has indicated that taxpayers unable to pay advance instalments for 2020 due to circumstances beyond their control may be able to request relief from penalties or interest after their 2020 return has been assessed. Please contact our top Toronto tax law firm for more information on requesting relief from CRA.

Pro Tax Tip – How to reduce or eliminate instalment payments

To reduce instalment payments, the taxpayer must reduce their net tax owing. If net tax owing is reduced below the threshold in their province, they may not be required to make instalment payments. Reducing net tax owing may occur involuntarily through a decline in net income for a given year, or voluntarily by increasing the amount of tax withheld at a source of income. Taxpayers earning income from Old Age Security, Canada Pension Plan benefits, Quebec Pension Plan, employment income, or pension benefits, can voluntarily increase the amount of tax that is withheld from those sources. However, this is not the case for self-employment income, investment and rental income, and capital gains. For advice on whether you are required to make instalment payments, or relief from instalment payments, please contact our experienced Toronto tax law firm.