The Importance of Personal Income Tax Instalments
Who Has to Pay Tax Instalments?
If you are an individual and your tax liability is greater than $3,000 in the current year and either of the two preceding years, then you are required to make quarterly instalments for the year. The quarterly instalment dates are as follows: March 15, June 15, September 15 and December 15. Note that you should receive an instalment reminder from the CRA (these are sent twice a year) detailing the dollar amount of instalments to make.
Tax instalments can be paid to the CRA directly through mail. They can also be made online through participating Canadian financial institutions. Online payments for tax instalments are essentially the same as paying your bills online. You simply set up CRA as a “payee” and make your quarterly instalments electronically on the required dates.
Failure to Pay Instalments
Failure to pay the required instalment amount on time could result in significant interest and penalties imposed by the CRA. Instalment interest, compounded daily, is calculated at 5% [CRA’s prescribed rate (1%) plus 4%]. In addition to the instalment interest charges, there is a penalty for making late instalments if the instalment interest for 2016 is more than $1,000.
You can reduce or eliminate the interest charges and penalties on late instalments by overpaying on your subsequent instalments. Any interest earned on the excess instalment amount paid will offset the interest charges on the late payments.
Benefits of Paying Tax Instalments
There are several benefits to paying tax instalments throughout the taxation year:
- Paying tax instalments helps to eliminate the possibility of cash flow problems arising from a large income tax payable amount.
- Paying tax instalments allows you to plan and manage your personal finances in a more effective way.
- If your tax liability turns out to be less than the total instalments paid, the amount will be refunded to you.