Tax instalments

Originally published in OVMA Focus Magazine January/February 2025

BY GREG TONER

Last year, I went to a corn maze with my daughter. I stumbled along for a few minutes and was thoroughly lost. Everywhere I turned, there was another dead end. I felt like I couldn’t get ahead, and my daughter was providing less than helpful suggestions.

For many Canadians, managing taxes can feel like navigating a maze of rules and deadlines. One area that often confuses taxpayers is the concept of tax instalments. Let’s break down what tax instalments are, the process for paying them, and some common misunderstandings that can create unnecessary complications.

Tax instalments are essentially prepayments of your estimated tax liability, allowing you to pay in smaller increments rather than in one large sum at the end of the year. This system, overseen by the Canada Revenue Agency (CRA), is especially useful for individuals with income that isn’t subject to regular payroll deductions, such as self-employed individuals, business owners or those with significant investment income. By making these scheduled payments, taxpayers can budget for their tax obligations more effectively, reducing the stress of a large annual payment and ensuring compliance with the CRA.

If you anticipate owing more than a certain threshold—usually $3,000 in most provinces—the CRA may require you to make instalments. This threshold is lower in Quebec, set at $1,800.

The frequency and amount of instalments depend on each taxpayer’s unique situation, including income stability and past tax liabilities. Instalments are typically due on a quarterly basis. However, individuals with fluctuating income may find it helpful to adjust their payments based on changes in income, helping to avoid overpayment or underpayment. The CRA provides tools to assist taxpayers in calculating their instalment amounts, simplifying the process of staying current with tax obligations.

Why are tax instalments necessary?

The tax instalment system serves as a fair and organized way to collect taxes on income that doesn’t have automatic payroll deductions. Regular contributions help fund public services and programs throughout the year, rather than waiting for a large lumpsum payment at tax time.

Failing to keep up with instalments can result in interest charges and penalties from the CRA, which aims to keep taxpayers current and compliant with their tax obligations. Not only can missing payments create unexpected financial stress, but falling behind on instalments may also impact a taxpayer’s liability in subsequent years. Staying on top of tax payments throughout the year can prevent a cycle of financial uncertainty.

How to determine your tax instalment amount

The CRA provides three primary methods to determine your tax instalment amount:

1. Prior year’s tax method: if you owed more than $3,000 on last year’s tax return (or $1,800 in Quebec), the CRA generally expects you to make instalments based on this amount.

2. Current year’s estimate: if you expect your income to change significantly, you can calculate an estimate for your current year’s tax and base your instalments on this projected figure.

3. Average of previous years: some individuals prefer to use an average of the past few years’ tax obligations to determine instalments, which can be especially useful for taxpayers with income that fluctuates year-to-year.

The CRA offers multiple options to make instalment payments. These include online banking, direct transfer, pre-authorized debit and mailing a cheque. Many people prefer online payments, as they allow easy tracking of due dates and instant confirmation, ensuring payments are received on time.

It’s wise to keep thorough records of each instalment payment. This not only assists in reconciling taxes at the end of the year, but it also provides an audit trail in the unlikely event of a CRA discrepancy.

Common misconceptions about tax instalments

There are several misconceptions around tax instalments that can lead to non-compliance. Let’s clarify a few of these:

MYTH | INSTALMENTS ARE OPTIONAL

Some individuals mistakenly believe that they can choose to skip instalments if they think they’ll owe little or no tax by year-end. However, once the CRA requires instalments based on your prior year’s taxes, skipping these can result in interest charges.

MYTH | INSTALMENTS ARE THE SAME AS ANNUAL TAX RETURNS

Another common misconception is confusing instalments with the annual tax return. While instalments are periodic payments toward your total tax liability, the annual tax return is a comprehensive filing of income, deductions and final tax obligations. Instalments aren’t a substitute for filing your annual return, nor does the final tax return eliminate the need to make instalments if the CRA has specified them.

Failing to make required tax instalments can lead to interest from the CRA. Unpaid instalments accrue interest based on the CRA’s current interest rates, compounding the debt and creating additional financial strain. While missing a single instalment payment might seem minor, repeated non-payment can escalate into serious tax problems, including collection actions and further penalties. Staying compliant with instalment payments is the best way to avoid these consequences.

Tips for managing tax instalments efficiently

One of the most effective strategies for managing tax instalments is proactive planning. Setting reminders or calendar alerts for instalment due dates can help ensure payments are timely. Additionally, you might consider setting up a separate savings account for tax purposes. Contributing regularly to this account can make it easier to manage instalments without disrupting other financial goals.

For those who find tax instalments overwhelming, working with a tax professional can make a significant difference. Tax advisors and accountants are skilled in calculating instalment amounts, advising on adjustments based on changes in income and ensuring that clients meet all CRA requirements. Investing in professional guidance can often save time, reduce anxiety and help avoid costly mistakes, particularly in complex financial situations.

Understanding the landscape is essential. With a map of a corn maze, it’s no big deal. Similarly, understanding what instalments are and why they’re due makes them far easier to understand. If you’re not sure whether your instalments make sense, talk to your accountant for help.

And if you’re wondering, we did eventually make it out of the corn maze.

Greg Toner, CPA, CA, TEP, CLU, is principal at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org

The VetCPA / OVMA Chart of Accounts

We’ve been working closely iwth the OVMA over the last few years to tailor a chart of accounts for an owner-managed veterinary clinic in Canada. A lot of the other standard options are overly granular in a way that is impractical to implement for an owner-managed practice. We’ve aimed to keep this as lean as possible. If you have any comments, please email Greg at greg@vetcpa.ca.

Our Chart of Accounts is available here.

Secure your practice’s future with an Employee Ownership Trust

Originally published in OVMA Focus Magazine September/October 2024

BY WILLIAM HILLOCK

Thinking back, university seemed like an endless parade of group work. Some group projects were more enjoyable than others, specifically the ones where students could choose their own group. Having the right people involved and knowing what each of us brought to the table made the project more enjoyable and often resulted in better grades.

Employee Ownership Trusts (EOT) could be thought of as a modern-day group project. An EOT is a specialized form of employee ownership, where a trust holds the shares of a company on behalf of its employees, ensuring they collectively benefit from the business’ success. An EOT provides veterinarians with a strategic option for succession planning that fosters a unified approach to practice ownership. In 2023, the federal government introduced new EOT rules, and, be aware, there are a few additional considerations for veterinarians to satisfy the regulations set out by the College of Veterinarians of Ontario.

For veterinarians contemplating retirement or transitioning ownership, an EOT offers a structured mechanism that differs from a traditional sale to an external buyer. Instead of selling to outsiders, practice owners can sell their shares to the trust, which is then held collectively for the benefit of all employees to share in the profits of the practice. This model not only facilitates a tax-efficient sale and smooth transition of ownership to the right people, but it also preserves the practice’s culture, values and commitment to high-quality pet care.

At a high level, implementing an EOT involves establishing a trust to acquire the shares of the qualifying business. A trust isn’t a legal entity, although it’s treated as such for Canadian tax purposes. A “trust” is simply the word used to describe the relationship created when property is transferred by one person (the “settlor”) to another (the “trustee”) to hold for the benefit of specified persons or a class of persons (the “beneficiaries”). The share purchase can be funded through a combination of internal financing mechanisms, bank loans or future profits.

As the trust acquires ownership, each team member becomes a beneficiary of that trust, aligning everyone’s interests toward the long-term success of the practice. This inclusive ownership structure not only empowers employees, but it also strengthens their dedication and engagement, fostering a culture of shared responsibility and pride in the practice’s achievements.

From a financial standpoint, an EOT can offer significant benefits to both the practice and its employees. The structure can provide tax advantages such as:

• The first $10 million in capital gains realized by the vendor would be tax-exempt for the 2024 to 2026 tax years.

• Ten years (instead of five) to claim the capital gains reserve and defer the tax resulting from a qualifying sale.

• Qualifying business can lend funds to an EOT to purchase shares with a repayment period of up to 15 years (instead of one year).

• Exemptions from the deemed interest on shareholder loans and 21-year deemed trust disposition rules.

An EOT also helps to ensure stability and continuity in operations. This financial security enables practices to reinvest in facilities, equipment and professional development, ultimately enhancing service delivery and client satisfaction.

Employee Ownership Trusts represent a forward-thinking approach to practice management and succession planning for veterinarians. An EOT not only secures the future of the practice, but it also promotes a collaborative work environment where every team member contributes to the practice’s growth and prosperity. By sharing ownership, veterinarians, technicians and support staff are incentivized to work together toward common goals, such as improving pet outcomes and expanding community outreach.

This model upholds a practice’s core values and standards of care, and it ensures that veterinary professionals can continue to serve their communities with dedication and passion, embodying the ethos of “we’re all in this together” in every aspect of practice ownership and management.

William Hillock, MAcc, CPA, CA, is director of tax compliance at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org

Can you predict the future?

Originally published in OVMA Focus Magazine July/August 2024

BY GREG TONER

As a kid, I loved the movie Back to the Future and its sequels. It has good humour and a great soundtrack, and there was something about the concept of knowing what’s going to happen in the future that stuck with me.

Early in my career, one of my mentors talked to his clients about “seeing what’s coming around the corner,” and that expression has resonated in many of my own discussions with clients.

How do we know what’s coming around the corner? Well, we don’t. But, if we spend some time thinking about what we want to be around that corner, we can then think about what will enable it to happen and what might prevent it from happening.

So, what do you want to be around the corner? More time with family? More money? A smoothly running practice with the capacity to handle surprises? Spend time thinking about this, as a poorly defined goal will give you results that you don’t want. Once you have an idea of what you want, think about:

• What are the things that are getting in your way?

• What are the things that you need to do more of?

• What are the things that you need to say no to?

Many practice owners I work with have a degree of chaos in their lives. They’re entrepreneurs, and every day brings new challenges. It can be the most rewarding and draining part of running a practice. This chaos can have an impact on them, their teams and their families. The most chaotic practices see high staff turnover, which adds to the chaos.

What if we could take away the most draining parts? For example, the feeling that everyone needs your time and that only you can solve issues that come up, or the anxiety during the slow days and the stress of busy days when you don’t have enough time to eat.

Getting control of the factors that add chaos to your day will help you predict how your days, weeks and months will unfold. You’ll be able to “see” into the future. These changes take time to make an impact. The top three changes that I’ve seen help practices are:

1 Tracking and reviewing key practice data.

There are a few key pieces of data from prior years that can help you predict what the next month or year will look like. Track things like the number of invoices, number of surgical cases, number of dental cases, revenues by service type, number of appointments and number of staff hours by role. It’s also important to know your clients and your client retention. Measure the number of active clients, new clients and pet ages. Monitor your practice’s performance relative to last year’s figures. Are you on track? What do you need to change? What levers do you need to pull to make those changes? It’s easy to watch revenues, but they don’t tell the whole story. By tracking these other data points, you’ll dig below the surface and get an idea of the health of your practice.

2 Developing and sharing clear processes for clinic operations.

Have processes in place for critical functions of your practice. For example, the beginning and end of day, new client visits, existing client visits and maintenance. If you do something more than once, you should have a documented process for that activity. This will ensure consistent results, and it will allow you to delegate more effectively. Make sure these processes are easily accessible and followed.

3 Hiring and promoting based on clear job descriptions and having a training plan.

Does your staff know the difference between an average and an amazing employee? Do they understand how to advance in your practice? What can they do to develop professionally? Having clear job descriptions and a progression of levels for the same role will allow you to identify who your star players are and reward them. It will also help your whole team progress, regardless of how skilled they are when they join your organization, since they have a path to follow. Develop training protocols for new hires, assign a mentor/trainer and have regular staff check-ins for your whole team.

If you have data (and more than just a revenue number), you can relax when it makes sense. You’ll know what’s normal and when it’s time to energize your staff and push harder. If you know what you want and don’t want to happen, and you document those processes and make sure they’re followed by your staff, you won’t have to worry about as many surprises. And if you hire and promote based on clear job descriptions and have a training plan to support those roles, you’ll be able to quickly identify who’s a good fit for your team and who isn’t. You may not be able to predict the future, but if you can reduce the number of surprises and move with more confidence through each day, isn’t it kind of the same thing?

Greg Toner, CPA, CA, TEP, CLU, is principal at VetCPA.

Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org