For most Canadians – certainly most Canadians who earn their income through employment – the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions, and premiums are deducted and remitted on the employee’s behalf to the Canada Revenue Agency (CRA). While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless.
Such is not, however, the case for the sizeable minority of Canadians who pay their income taxes by way of tax instalments, and February is the month in which they are reminded of that obligation by the arrival of the first tax instalment reminder for 2017 from the CRA. A reminder received this month will identify the amounts for two instalments payments of tax to be made — the first on March 15, 2017, and the second on June 15, 2017.
Generally, a taxpayer will receive a tax instalment reminder when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an instalment reminder will usually be issued by the CRA where the amount of tax which was or will be owed when filing the annual tax return is more than $3,000 in the current (2017) tax year and either of the two previous (2015 or 2016) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax owed for 2017 and either 2015 or 2016.
Such obligation arises on a regular basis for those who are self-employed, or course, and generally for those whose income is largely derived from investments. The group of recipients of a tax instalment reminder often also includes retired Canadians, especially the newly retired, who have not arranged to have tax deducted “at source” from either their government source income (like CPP or Old Age Security payments) or private retirement income like pensions or registered retirement income fund withdrawals. It is that group of individuals, who may be surprised and puzzled by the arrival of an unfamiliar “Instalment Reminder” from the CRA. However, no matter what kind of income a taxpayer has received, or why sufficient tax has not been deducted at source, the options open to a taxpayer who receives such an Instalment Reminder are the same.
First, the taxpayer can pay the amounts specified on the Reminder, by the March and June payment due dates. Choosing this option will mean that the taxpayer will not face any interest or penalty charges, even if the amount paid by instalments throughout the year turns out to be less than the taxes actually payable for 2017. If the total of instalment payments made during 2017 turn out to more than the taxpayer’s total tax liability for the year, he or she will of course receive a refund when the annual tax return is filed in the spring of 2018.
Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2016 tax year. Where a taxpayer’s income has not changed significantly between 2016 and 2017 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2017 will be slightly less than it was in 2016, as the result of the indexation of both income tax brackets and tax credit amounts.
Third, the taxpayer can estimate the amount of tax which he or she will owe for 2017 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2016 to 2017, such that his or her tax bill will also be substantially reduced, this option can make the most sense.
A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges if there is no tax payable when the return for the 2016 tax year is filed in the spring of 2018. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2017 – until March 31, 2017 – is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to levy penalties for overdue or insufficient instalments, but that is done only where the amount of instalment interest charged for the year is more than $1,000.
Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.
