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