Some people may wonder why should you pay your tax instalments and what’s the big deal if you don’t? The answer is simple; if you owe more than $3000 a year in income tax, instalments are mandated. As with anything else the CRA does, failure to do so equates to penalties and interest of course. We don’t know about you, but we think the CRA already gets enough of our hard earned dollars without us adding on the extras!
Let’s get serious though…
If the income you make doesn’t have income tax withheld at source, or if you have not paid enough tax based on your income, this is where the mandated tax instalment may come into play. This would happen, for example, in any of the following situations:
• If you have rental properties, which make a profit for you
• Investment income from your wisely invested money (hopefully lol)
• Self-employed income and c
• Certain types of taxable pensions
• If your employer has not taken enough tax off you throughout the year
There are two factors to consider when the CRA determines if you have to pay instalments;
1) The province you live in
2) Balance owing
The province you live in will determine the amount of taxes owing, which could cause you to have to make instalments to the CRA.
For example, if you live in Quebec and owe 1,800.00 or more in taxes, you will be required to make instalment payments to the CRA for the following year. If you live in any other province, the 1,800.00 limit would increase to 3,000.00.
It is important to note at this time, you do not have to make instalment payments on your taxes owing for 2019, and if you net tax owing will be less than 1800.00 or 3000.00, even if you receive an instalment reminder. However, remember, if at the end of the year, if your net tax owing is more than the threshold for your province and you didn’t make the required instalments, you will have to pay interest and penalty charges.
Instalment Reminders are just that, a reminder form CRA that you owe them incomes taxes based on history and they want their money. These reminders are mailed out via Canada Post or processed through your My Account in February of the current year for your March 15th and June 15th payments and another one in August for your September 15th and December 15th payments. You can also see your instalment reminder online using your My Account and view the instalment balances received to date on your account.
Now you may be asking yourself, what are these instalment payments based on? Good Question!
The instalment payment are based on the following;
1) Your net tax owing ( the amount of taxes owing to CRA on your last filed tax return )
2) Any Canada Pension Plan ( CPP ) owing on your self-employed income
3) Any voluntary Employment Insurance ( EI ) owing on self-employed income, EI on self-employment is a voluntary choice it is not mandatory
There are three options to choose from in order to calculate your instalment payments;
This is the one the CRA uses, and is the best one for you to use if your income, deductions and credits stay roughly the same each year. CRA determines the amount of your taxes owing based on the information from your latest filed tax return.
2) Prior-Year Option:
This method would be great for you if your credits, deduction and income were similar to 2018, but significantly different than 2017. The amount of tax owing is bases on your results from 2018 tax year. If you use this method and make your payments on time, you will not be charged interest or penalties unless the amount you calculated is too low.
3) Current-Year Option:
This is the best option for you if in 2019, your income, credits and deductions will be significantly different from 2017 and 2018. You calculate your instalment amounts owing based on your estimated current year net tax owing. Use the below chart to help you calculate what you will owe, but remember if you pay too little you will have interest and penalties applied.
Food for thought before You go!
If your income is from Farming or Fishing and you owe taxes, you will only have to make one instalment payment a year. You will receive a reminder in November and you have to make the payment by December 31st. If an individual who has to pay tax instalments for the year dies, the payments after this do not have to be paid.
If you pay more than required in instalment payments when you file your current return, these amounts will be refunded to you.
Well there you have, what the CRA expects form us regarding instalments on our taxes owing; REMEMBER IF YOU AR LATE OR THE PAYMENTS ARE TOO LOW, YOU MAY HAVE INTEREST AND PENALTIES, SO LET’S KEEP WHAT WE CAN IN OUR OWN BACK POCKET!
~ Douglas Ross ~