The CRA requires taxpayers to make installments if they owe tax at the end of the year. But if your income is low or expenses are high, it can be tough to keep up with the installments the CRA is asking for. So what happens if you can’t pay the CRA installments?
Don’t worry if you don’t pay installments
If you can’t make your installments, don’t panic. The worst that will happen is you’ll accumulate interest on the unpaid amount starting from the due date of the installment.
Why CRA is asking for installments
When asking for installments, note that owing tax is usually the starting point. Most of the time owing income tax is when no tax is being withheld from some of your income. This is often the case for freelancers. Freelancers face this situation because their clients don’t withhold any tax on the Online payments they receive so the freelancer has to settle their tax obligations at the end of the year.
Owing Tax History
If your total tax bill is more than $3,000 for two out of three consecutive years, the tax authority will ask you to make installments. The installment amounts for a particular year will be the amount you owed the previous year. For example if your tax bill was $4,000 last year, you may be asked to pay $1,000 in installments, usually 4 times a year.
Sometimes not paying CRA installments is okay
The amount and schedule of installments are based on the previous year’s income tax return. However, the interest on unpaid installments is calculated on the current year’s income, not the previous year.
If You Know Your Income is Down
If your tax bill was $4,000 last year but this year your income is down and you expect your total tax bill to be only $2,000, you may not have to make installments. Since only tax bills over $3,000 require installments, when you file your return the CRA will determine that you don’t actually owe installments. So no interest will be charged on the “missed” installments as they are deemed unnecessary in hindsight.
If You Know Your Income is Up
If last year’s tax bill was $4,000 and you paid the 4 x $1,000 installments as required, what happens if upon filing it turns out you actually owe more tax? In this case the CRA won’t charge you interest on the shortfall because the additional installment wasn’t required; only the requested amount.
In a nutshell: If you want to avoid interest, pay the installments or pay enough to cover your tax bill, whichever is lower.
You don’t have to go with CRA’s requested amounts
Remember you have more information about your current year’s income than the Canada Revenue Agency (CRA) does. They won’t have this information until you file your return. So you have the option to set your own installments based on your income. If you don’t want to set your payments, you will accrue interest. If you hate interest, pay the installments or more – if you overpay, CRA will refund the excess.
If you owe the Canada Revenue Agency (CRA) money this year from your business you might be wondering if you need to make tax installments.
Tax obligations can be complicated and overwhelming, especially for small businesses. In Canada the Canada Revenue Agency (CRA) requires businesses to pay their income tax on time. But many small Canadian businesses don’t have the cash flow to pay their taxes all at once and it puts a lot of stress on their finances.
Many people find themselves in a situation where they pay penalties and interest because of late or missed payments to the CRA. But there are options to make these payments in installments and reduce the stress and pressure.
Can I pay my taxes in installments?
If the amount of tax you paid when you last filed your income tax return was over $3,000 you may have to make tax payments 4 times a year instead of all at once at tax time. This is called making quarterly tax installments and the Canada Revenue Agency (CRA) expects you to do this to spread out your tax payments throughout the year.
How do I know if I’m supposed to pay in installments?
Tax reminders from the CRA will review your previous year’s tax return and send you a letter by mail. Or you can opt to receive email reminders by logging into your CRA My Account. The due dates for tax payments are March 15, June 15, September 15 and December 15.
How much do I pay per installment?
To calculate how much you need to pay each month for the upcoming year you have 3 options.
No calculation option
If your income, deductions and credits remain the same from year to year the Canada Revenue Agency (CRA) will calculate the number of your installment payments based on the information in your most recent assessed tax return. You will pay the same installment amounts every year. Any differences in amounts due or owed will be adjusted when you file your tax return.
Prior year
If your income, deductions and credits for the upcoming year will be similar to last year but different from two years ago you should make the same installment payments as last year.
Current year
When calculating your tax installments for the year make sure to factor in any changes to your income, deductions and credits from previous years. You should calculate your installments based on the net tax owing for the current year.
What happens if I don’t pay in installments?
Not paying by installment will result in interest and penalties.
- Installment interest rate 4%
- Installment interest is compounded daily
- Penalty for late installments or paying less than expected.
How do I pay my installments?
You have several options to pay your taxes to the Canada Revenue Agency (CRA). You can pay through your CRA My Account, set up a pre-authorized payment, pay through your financial institution or send a cheque to the CRA (make sure it’s post-marked by the installment deadline).
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