How do quarterly income tax installments work?

Can this installment be used for the 2021 tax year?

—Robert

What happens when a tax installment is paid in the wrong calendar year?

The short answer to your question, Robert, is that your installment payment applied to 2022 can be transferred back to your 2021 installment balance. The effective date of the payment should be the date you paid it and not the date it gets transferred. It is not uncommon for payments like this to be misapplied. But for more context, we should talk about how tax installments work. 

How tax installments work

Personal income tax owing is due by April 30 each year, except for years like 2022 when that date falls on a weekend. When that happens, the deadline is extended to the next business day. For 2022, the deadline is May 2.

Taxpayers whose net tax owing is more than $3,000 in two consecutive years will be asked to pay quarterly tax installments. For Quebec residents, the federal tax threshold is only $1,800 (Quebec taxpayers may also have provincial tax installments). 

Tax installments are prepayments of tax for the current tax year. The Canada Revenue Agency (CRA) figures if you owe tax for two years in a row, there is a good chance that you will owe tax again this year. The payments are based on the tax you owed during the past two years, which may or may not be a good indication of tax owing for the current year. 

When are tax installments due?

CRA will send quarterly tax installment reminders for March 15 and June 15 in February of the same year and for September 15 and December 15 in August the same year. These reminders are often mistaken for balances due, but they are actually just suggested payments. They are based on one of the three installment payment options—the no-calculation option. 

The no-calculation option is the easiest option and it involves making the payments based on the CRA installment reminders. The March and June payments will be based on your net tax owing from two years ago, so your 2020 tax owing for March and June 2022. The payments will be one quarter of your tax owing from two years ago for each of March and June. The September and December payments will then be based on your net tax owing from one year ago, so 2021 tax owing for 2022 installments. These final payments are based on the net tax owing from the previous year, minus the March and June payments already made, divided by two. 

As an example, if you owed $10,000 of tax in 2020 and $20,000 of tax in 2021, your March and June 2022 payments would be $2,500 each and your September and December 2022 payments would be $7,500 and $7,500—so, $20,000 in total, like the previous year’s net tax owing. 

The prior-year option is based on paying one quarter of your net tax owing from the previous year for each of the four payments. So, $5,000 for March, June, September and December, in the case of $20,000 owing in the previous year. 

The current-year option may be preferable if your income is lower this year than the previous two years. Sometimes, you have a temporary increase in your income due to an extraordinary event that may not apply this year. If this is the case, and you expect to owe less tax, or no tax, you can pay less, or possibly not pay anything at all. 

Farmers and fishers do not pay quarterly tax installments. They make one payment on December 31. 

Why you get notified to pay tax in installments

It sounds like you did not pay enough installments during 2021, Robert, so you made a late payment for 2021 in February 2022. If you owe tax, and you underpaid your installments, you may owe interest or penalties. If you did not make your payments on time based on one of the three installment payment options, you will be assessed installment interest. 

The installment interest calculation is based on the payment calculation that results in the least amount of interest (no-calculation, prior-year, or current-year). If your installment interest is less than $25, you will not be assessed any interest, Robert. If it is more than $1,000, you will be assessed a penalty of 25% of the installment interest in addition to the interest. 

What happens if you’re late paying, or you under- or overpay your tax installment

If you are late paying a quarterly installment, or you underpay, you can reduce your interest charges or penalty by overpaying a subsequent payment, or by making another payment early. For example, if you make your March payment three months late in June, you can make your December payment three months early in September to earn installment credit interest that reduces interest charges. 

Installment payments are applied to your tax owing on your tax return just like tax withheld on other sources of income. If you overpay your installment payments, you will receive a refund when you file your tax return. It is common for self-employed taxpayers and retirees to pay quarterly tax installments, as well as those with significant investment or rental income.

There are different kinds of installment payments for different types of taxpayers. Self-employed sole proprietors and partners who collect sales tax may need to make GST/HST installments. Corporations may need to pay corporate tax installments. Many taxpayers do not have to pay any type of installment payments, but those who do should be sure to know how they work and how best to plan for them. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

Read more from Jason Heath:

• Can you avoid probate taxes on TFSAs?
• How are you taxed when you sell a small business?
• What to do when you overcontribute to your RRSP
• Converting a segregated fund to a RRIF

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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