The Canada Revenue Agency (CRA) requires individuals who earn income with no tax withheld or insufficient tax withheld to make income tax payments in instalments throughout the year.
If you are required to pay personal income tax instalments, the current high-interest rate environment means there is a considerable cost to making late or insufficient tax instalment payments. The interest portion of this cost is higher than current market rates of interest as the interest charged by the CRA is generally 4% more than current rates.
Before we look further at the impact of the recent interest rate hikes on your tax bill, let’s review the income tax instalment requirements and calculation options for individuals.
Instalment requirements
Individuals who are required to make income tax instalments are often those who earn income that is not subject to tax withholding at source, such as investment income, and those who are self-employed. More specifically, if your total tax liability, less the portion that was withheld at source, is greater than $3,000 ($1,800 for Quebec residents) for both the current year and either of the two preceding years, you must make instalments for the current year.
The good news is that CRA will make this determination and send you instalment reminders if you are required to make instalment payments. Revenu Québec follows a similar approach. If you receive a reminder, it’s important that you make the required instalments on time unless you are certain that your current year’s unpaid tax liability when you file your 2023 tax return will not exceed $3,000 ($1,800 for Quebec residents).
Instalment due dates
Where required, quarterly instalment payments are due on March 15, June 15, September 15 and December 15. The CRA sends out instalment reminders twice a year – the February reminder is for the March and June payments, and the August reminder is for the September and December payments.
If your main source of income is self-employment income from farming or fishing, and you’re required to make instalments, your payment is due on Dec. 31.
Calculation options
Where you’ve exceeded the $3,000 threshold in 2021 or 2022 and will exceed it again in 2023, you have three options to calculate your 2023 instalment payments: (1) the no-calculation option, (2) the prior year option, and (3) the current year option, as summarized below.
No-calculation option
- Instalment amounts are indicated on CRA’s reminders (for 2023, your March and June instalments are based on your 2021 tax liability and your September and December instalments are based on your 2022 tax liability)
- Best if your income, deductions, and credits remain similar year-to-year
Prior year option
- Payments are equal to your 2022 tax liability in four equal instalments
- Best if your income, deductions, and credits remain similar to 2022, but differ significantly from 2021
Current year option
- Payments are equal to your 2023 estimated net tax owing, Canada Pension Plan contributions payable and voluntary Employment Insurance premiums payable, in four equal instalments
- Best if your 2023 income, deductions and credits will result in your 2023 taxes being significantly lower than your 2022 and 2021 taxes
Tax Bulletin - Failure to pay tax instalments can be costly
With the 2023 tax return season almost here, we want to remind you of the importance of paying personal income tax instalments.
Read moreInterest and penalty charges
The CRA may charge you substantial interest and penalties if you don’t pay the required instalments on time. Instalment interest is calculated at the CRA’s prescribed rate plus an additional 4%. The prescribed rate is set quarterly and approximates short-term money market rates set by the Bank of Canada.
With the recent interest rate hikes, the interest rate on overdue taxes is currently 9%.
The prescribed interest rate has not been this high since the fourth quarter of 2007, over 15 years ago. Remember that instalment interest charges are compounded daily, bringing the effective annual rate to over 9.4%. Note that this interest rate also applies to the unpaid balance from your 2022 tax return balance-due date until the date the balance is paid. If needed, you may be able to borrow funds from a financial institution at a lower interest rate.
In addition, CRA may charge a penalty on late or insufficient instalment payments. The penalty can apply if your instalment interest is more than $1,000. It is calculated by taking your actual instalment interest charges for 2023, subtracting the higher of $1,000, or 25% of the instalment interest that would be payable if you had not made any instalments for 2023, and then dividing the difference by two.
In Quebec, the current interest rate charged on amounts owing is 10%, and an additional interest of 10% per annum, compounded daily, is applicable where the amount of an instalment payment is less than 75% of the amount the taxpayer is required to pay.
Note that trusts (other than a graduated rate estate) may also be required to make instalment payments. However, the CRA’s administrative policy is that they will not assess penalties or interest where a trust fails to make sufficient instalment payments.
Ways to reduce or eliminate interest charges and penalties
If you’re behind on your March and June 2023 instalments, it’s not too late! You can reduce or eliminate the interest charges and penalties by overpaying your September and December instalments or paying them early. This is because the CRA will calculate a notional interest on early or excess payments that will be offset against interest charges on late payments. Since instalment penalties are charged on the net interest, they will also be reduced.
The information in this publication is current as of June 1, 2023.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.