If you are self-employed, earn rental income, or have investment income that does not have tax withheld at source, CRA may require you to pay quarterly tax instalments. Missing these payments or paying too little results in instalment interest, which is charged even if you eventually pay the full amount by the April 30 deadline.

Who needs to pay instalments?

You must pay instalments if your net tax owing (federal and provincial combined) is more than $3,000 in the current year AND was more than $3,000 in either of the two prior years.

CRA sends instalment reminders in February and August, but these are not bills. You are responsible for paying even if you do not receive a reminder.

When instalments are due

For individuals, the due dates are:

  • March 15
  • June 15
  • September 15
  • December 15

Three methods to calculate your instalments

  1. No-calculation option: pay the amounts CRA suggests on your instalment reminder. CRA bases the first two payments on your tax from two years ago and the last two on your tax from the prior year.
  2. Prior-year option: pay 1/4 of your prior year’s net tax owing each quarter.
  3. Current-year option: estimate your current year’s income and pay 1/4 of the estimated tax each quarter. This works if your income has dropped significantly, but if you underestimate, you will owe instalment interest on the shortfall.

Instalment interest and penalties

CRA charges compound daily interest on late or insufficient instalment payments. The prescribed interest rate changes quarterly and has been in the range of 8-10%.

The instalment interest is not deductible.

Tips to manage instalments

  • Set up pre-authorized payments through CRA My Account.
  • If your income is growing year over year, use the no-calculation option (CRA’s reminder amounts) because it is based on prior years and will be lower.
  • If your income has dropped, use the current-year method and keep documentation of your estimate.
  • If you are incorporated, make sure both your corporate instalments and your personal instalments are covered.

A common mistake

Many self-employed people forget about instalments in their first year of high income. The instalment obligation kicks in based on prior years, so in your first year earning over the threshold, you may not owe instalments. But in your second year, CRA expects them. Plan for it.

L&R Accounting calculates instalments for individuals and corporations and can set up pre-authorized payments so you stay on track. If you are not sure whether you need to pay, we can check your prior returns and let you know.

Geetha Srinivasan, CPA (Ontario), CPA (US)
L&R Accounting Services Ltd.