Paying Taxes in Installments: What CRA Expects

As a self-employed individual or small business owner in Canada, managing your taxes can sometimes feel overwhelming. One of the options the Canada Revenue Agency (CRA) offers to help manage large tax bills is paying taxes in installments. However, there are certain guidelines and expectations that you need to follow to stay compliant and avoid penalties.

In this article, we’ll explain how paying taxes in installments works, who needs to pay them, and what the CRA expects from you.

What Are Tax Installments?

Tax installments are periodic payments made towards your tax bill, rather than paying the full amount at once when you file your tax return. This option is available for self-employed individuals and business owners whose taxes are not automatically withheld by an employer.

Rather than waiting until the end of the year to pay a lump sum, installments allow you to spread the cost of your taxes over the year, making it easier to manage your cash flow and avoid a large tax bill in one go.

Who Needs to Pay Taxes in Installments?

The CRA generally requires individuals or businesses to pay taxes in installments if they owe more than a specific amount of tax at the end of the year and have a history of consistently owing taxes.

Here are the common situations where you may be required to pay taxes in installments:

• Self-employed individuals: Freelancers, contractors, and business owners whose income is not subject to withholding taxes.

• Corporations: Businesses that have a net income that exceeds a certain threshold.

• High earners: If your net tax owing is above a certain amount in previous years (typically more than $3,000), you will be expected to make installment payments.

If you owe more than $3,000 in taxes (or $1,800 if you live in Quebec), the CRA will notify you that you need to pay taxes in installments. The CRA may also require installment payments if your previous tax return shows that you consistently owe more than $3,000.

How Do CRA Installments Work?

The CRA provides two methods for calculating tax installment payments:

1. The No-Instalment Method

If you’ve been consistently paying your taxes on time, the CRA might not require you to pay installments. However, this method is rare and applies only to those who have a history of no outstanding taxes.

2. The Instalment Method

Most taxpayers will need to pay their taxes in installments. The CRA calculates the amount you must pay based on your prior year’s tax liability, or it may offer a more tailored calculation based on your projected income. The CRA will send you a notice with the dates and amounts due for each installment.

• Quarterly payments: Installments are typically due four times a year—March, June, September, and December.

• Installment due dates: You’ll receive an installment reminder with the payment amounts and due dates.

CRA’s Installment Payment Schedule

• March 15 – First installment

• June 15 – Second installment

• September 15 – Third installment

• December 15 – Final installment

These dates may vary depending on the payment schedule you choose or what the CRA determines based on your previous year’s taxes.

What Happens If You Miss an Installment?

Missing an installment payment can lead to penalties and interest charges. The CRA adds interest on overdue payments, and the longer you wait to make a payment, the higher the penalties will be.

• Interest on overdue installments: The CRA charges interest on any overdue installment payments. The interest rate can change quarterly, so it’s important to stay on top of your payment deadlines to avoid any extra costs.

• Penalties: If you fail to make your payments or don’t pay enough, the CRA may impose additional penalties, which can increase your tax liability.

If you miss a payment, it’s best to catch up as soon as possible to minimize penalties and interest. The CRA can also send reminders or notices to remind you of any missed payments.

How to Make Tax Installment Payments

You can pay your CRA tax installments in several ways:

• Online banking: Many financial institutions offer CRA payment options through their online banking platforms.

• CRA’s website: You can also make payments through the CRA's online portal, My Payment, using a debit or credit card.

• Pre-authorized debits: Set up pre-authorized payments through your bank so that installments are automatically deducted from your account.

• Cheque or money order: If you prefer traditional payment methods, you can send cheques or money orders to the CRA.

It’s important to use the proper payment method to ensure that your payments are correctly recorded. When making online payments, always include your Personal Identification Number (PIN) or Business Number (BN) to ensure the payment is applied to the correct account.

Tips for Managing Tax Installments Effectively

Managing your tax installments requires planning and organization. Here are a few tips to help you stay on top of your payments:

1. Set Aside Money Regularly

To ensure you can cover your installments, it’s a good idea to set aside a percentage of your income every month. Setting up a separate savings account for your taxes can make it easier to stay on track.

2. Use Accounting Software

Using accounting software, like QuickBooks or Xero, can help you track income and expenses and estimate your tax liability. These tools often integrate with the CRA's payment system, making it easier to stay compliant.

3. Stay Organized

Maintain proper records of all business-related income and expenses throughout the year. This will help you calculate your taxes more accurately and ensure you’re paying the correct amount of installments.

4. Make Use of CRA’s Installment Calculator

The CRA provides an online tool to help you calculate your required installment payments based on your previous year’s taxes. This tool helps you avoid errors and ensures you’re paying the correct amount.

Conclusion: Avoiding Surprises with CRA Installments

Paying your taxes in installments can provide relief by spreading out your tax burden throughout the year. However, it’s important to keep track of your payments, due dates, and amounts to avoid penalties and interest. By planning ahead and keeping your finances organized, you can make tax season a lot less stressful.

Are you self-employed and need help with managing tax installments? At Tikitax, we specialize in bookkeeping and tax services to ensure you're on track with your CRA installment payments. Contact us today to get started!