The federal government is allowing businesses and individuals to defer income tax payments including instalments—until September 1—as part of its fiscal stimulus package to respond to COVID-19. This deferral applies to corporate and personal income tax that became owing on or after March 18. This means that in the coming weeks and months, you do not need to submit tax balances or tax instalments owing to the CRA until September 1. Please refer to our Tax Alert – Federal and Québec Governments Extend Income Tax Filing and Payments Deadlines.
Reduction of instalment payments
Many self-employed individuals and businesses are required to make instalment payments on the estimated income tax they will owe for the current year. Individuals and many Canadian-controlled private corporations (CCPCs) pay these instalments on a quarterly basis. Many larger corporations generally pay monthly instalments. These instalment payment amounts are effectively calculated based on what the taxpayer believes will be the balance of tax owing for the year.
When considering how much to pay in tax instalment payments, keep in mind that instalments are calculated based on the lowest amount of: 1) the current year estimated taxes; 2) taxes owing for the immediately preceding year; or 3) a combination of tax owing for the immediately preceding two years.
What happens when projected income changes to a reduced amount as a result of the impact of COVID-19? In this case, there are two options to maintain higher cash flow for a business:
Save on future instalments
By reducing instalments for the balance of the fiscal year, the company can preserve cash. Recalculate and submit instalment payments based on the reduced current year estimated income.
A word of caution: Projecting income during uncertain economic conditions can be difficult. It is important to preserve as much cash as possible to operate the business— but it is also key to pay sufficient amounts in instalments. If instalment payments are lowered your income then rebounds to outperform projections, the CRA will charge interest on any underpayment of taxes. That interest rate is currently 6% and is adjusted every quarter. The government recently announced the ability to defer payments due after March 18, 2020 without interest if paid prior to September 1, 2020.
Transfer past instalment overpayments to GST/HST or payroll
Corporate income tax instalments that have already been submitted may end up being significantly more than the estimated income taxes for the current taxation year. In that case, consider transferring the corporate income tax instalment balances to your payroll and HST remittance accounts. It is necessary to request this change of the CRA, or contact your BDO advisor to transfer the funds.