Hard to believe we are already in September! The crisp fall air is among us and the children are on their way back to school. It is definitely a busy time for everyone. For many, worrying about tax obligations could be the absolute farthest thing from your mind. However, as September 15th is quickly approaching, some may be determining the amount of their quarterly tax installment to make it by the deadline.
If you earn income from self employment, rental properties, investments or a second and third job, you may be required to pay tax by installments. This is a result of not having enough tax withheld from all various sources of income throughout the tax year.
Tax installments are set up so that Canada Revenue Agency (CRA) can collect tax obligations throughout the year, rather than in one lump sum payment at tax filing. These payments may seem like you are paying taxes in advance but in reality, you are simply making payments on taxable income as you earn it during the year.
Due dates for personal tax installments are the same for everyone. The deadline dates are set for March 15th , June 15th , September 15th , and December 15th. Typically, CRA will send out installment reminders twice a year to anyone who may have to pay.
Please note that if you have a business and registered for HST, you may also be required to pay Harmonized Sales Tax (HST) installments and if you have an incorporated business, you may also be required to pay corporate tax installments. The HST and corporate deadlines, could run per calendar quarter as personal installments do. However, depending on your fiscal year end, these deadlines may also vary.
How are your personal tax installments determined you ask?
Every province (except Quebec) has an income tax owing threshold of $3,000. This is the amount that would be owing on your income tax return come April 30th of any given tax year. Personal tax installments are determined if you owe more than $3,000 in two consecutive taxation years. For example, if you owed $3,000 in both the 2018 and 2019 taxation years, then come August 2020, you should then begin to receive your first installment reminder of what you are required to pay as of September 15, 2020 to avoid installment interest.
Taxpayers who receive an instalment reminder from the CRA have three available options. The first and easiest, is to pay the amounts indicated on the instalment reminder by the specified due date. This is called the no-calculation method. The second option is the prior-year option, which uses your net tax owed from the last tax year to determine what is owed this year. This option is most applicable if you have maintained similar income for the past year, but different to the year before that. The last option available to you is the current-year option, which is based solely on this year’s tax information. This option may apply to you if your employment has recently changed and you expect to owe less than previous years.
As a taxpayer who is required to pay installments and does not pay installments by the due date, penalties and interest can be assessed if there turns out to be a balance payable after income tax filing. Instalment interest on all late or insufficient payments is compounded daily and can add up quickly.
We would also like to note that you can pay installments even if you are not required to do so. Canadian taxpayers may find this helpful for the 2020 taxation year, especially if they received any Canadian Emergency Response Benefit payments (CERB).
Kelly Rust, CEO of our company, mentioned in a recent social media video, that tax installments may be beneficial to those who have received CERB payments in the 2020 year. This is because no income tax has been deducted on this earned income. If you make voluntary installment payments in 2020, it may put your mind at ease come tax filing season with not having the possibility of a large tax balance to pay.
The best and most efficient way to pay any tax installments, whether personal, corporate or HST, is either through your online banking portal or through CRA’s “mypayment” option. You will want to ensure that you choose the option that relates to a “2020 installment payment” as opposed to a “2019 tax payment” “CRA arrears payment” or “CRA balance owing payment”, which are a few of the most common choices.
The squad at SheDo Tax is always happy to answer your enquiries and help with your calculations about tax installments whether personally or for business on your HST and corporate accounts. Reach out to any of our squad members at firstname.lastname@example.org or phone us at 289-758-9501.
Hope everyone is remaining happy, healthy and smiling!