Financially Speaking

You may have received a reminder notice from the Canadian Revenue Agency (CRA) indicating that you should make a quarterly tax installment. It is important to make these payments on time because ignoring the notice may be costly.

You may have to make tax installments if you received or earned any income that is not subject to withholding at source, such as business or investment income and/or if you received or earned income with a low rate of withholding at source, such as pension income and your net tax owing is greater than $3,000 in 2016 and either 2015 or 2014.

The CRA determines if you must pay installments based on your tax returns from prior years and will send you a reminder notice to make these payments – in February for the March and June payments and in August for the September and December payments. If you receive a reminder notice but you do not comply you may be subject to interest and penalty charges.

For the 2016 taxation year, the CRA will base your first two installments on your 2014 tax liability with the final two being adjusted so the total of the four installments equals your 2015 tax liability. This calculation method can result in an over-payment of tax if, for example, your income has decreased over the past two taxation years. If you overpay, you will earn installment credit interest that is not refundable and can be used only against interest payment charges on late payments for the same tax year. (Check with your advisor or accountant before making a payment to see if your installments should be reduced.)

If you do not make your payments on time or paid less than you had to pay, you will be charged installment interest at the prescribed interest rate compounded daily (currently at 5% which is subject to quarterly adjustments) with the interest calculated on each installment payment beginning from the day it was due.

You may also have to pay a penalty (if your installment interest charges for 2015 are more than $1,000). The amount of the penalty is determined by which of the following amounts is higher:

• $1,000 or
• 25% of the installment interest you would have to pay if you had not made installment payments.

To calculate the penalty, the CRA subtracts the higher amount from your actual installment interest charges for 2016 and divides the difference by two. The cost of not making your installment payments can be substantial – it may even make sense to borrow to pay the installments. But don’t rush into another unnecessary expense especially if you know your income is decreasing. Talk to your professional advisor about the best tax planning and investment decisions for you.