Approximately 1.8 million taxpayers are required to pay tax instalments each year. These instalments are required where a taxpayer owed more than $3,000 in the previous two years (2019 and 2020) and their net owing for 2021 will be more than $3,000.
Instalments are owed on the 15th of March, June, September and December.
If you’re required to pay tax instalments, there are three options to figure out how much you owe.
The Canada Revenue Agency (CRA) calculates March and June’s instalments based on ¼ of your net owing in 2019. The September and December instalments are based on your 2020 tax owing minus the amounts paid in March and June.
This option only uses your previous years’ income. So that means your 2021 instalments are based on your 2020 tax owing. Each of your four payments in March, June, September and December will be ¼ (25%) of your 2020 tax owing.
You should choose this option if your 2021 tax position will be similar to your 2020 tax position, but different from your 2019 tax position - i.e. in 2020 you got a promotion that significantly changed your annual salary.
If your income was significantly reduced in 2020 because of the pandemic and it will continue to be affected in 2021, this option may also be the best choice.
The current year method uses your estimated tax owing for 2021. Once you have calculated your expected tax owing for the year, you’ll pay 25% of that amount each quarter.
You should choose this option if your income will be substantially less in 2021 than it was in 2020.
If you remit your required instalment payments on time, there will be no interest or penalties. If you ignore the notice to pay, you will be charged a compounded daily interest rate of 5% on overdue taxes, using the option that results in the least amount of interest.
If you do happen to miss a payment, you may be able to offset interest on late instalments by paying the next one early.
For help determining the best option for your instalment payments in 2021, contact our team of professionals today.