This time of year the taxes that most Canadians are thinking of are the 2013 income taxes due on April 30. However, many Canadians will be reminded that the Canada Revenue Agency (CRA) is already thinking of taxes which will be owed for 2014 when they find an instalment reminder in their mail. For Canadians who have received many of such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are new to that process, however, both the reminder itself and figuring out how to deal with it can be baffling.
For the newly retired, or perhaps the newly self-employed, who have been accustomed throughout their entire working life to having tax deducted from their paycheque and then remitted to the CRA on their behalf, receipt of an Instalment Reminder may be particularly puzzling. However, the instalment reminder process is triggered where deductions made at source (that is, deductions made by the payor and remitted on the individual payee’s behalf to the CRA) are not made at all (as in the case of self-employment income) or are not sufficient to cover the individual’s income tax bill for the year (as often occurs with retirees, especially the newly retired). However, no matter what kind of income one receives, or the reason that sufficient tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are identical. Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2014) and either of the two previous years (2012 or 2013). 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 liability for the current and either of the two previous years. Such instalment payments of tax are then due on March 15, June 15, September 15, and December 15 of each year.
An Instalment Reminder issued by the CRA in February 2014 will specify two amounts, one to be paid by March 15 and the other due by June 15. Each of those amounts represent the Agency’s best estimate based on the taxpayer’s return filed for the 2012 taxation year of one quarter of the net tax which will be payable by the taxpayer for 2014. The taxpayer then has the following three options.
First, the taxpayer can pay the amounts specified on the Reminder by the respective due dates of March 15 and June 15. (As March 15 falls on a Saturday this year, the March instalment payment will be considered paid on time if it is paid by the following Monday, March 17. Similarly, the June 15 payment deadline falls on a Sunday this year, and that payment will be considered paid on time if it is paid by the end of the next business day, Monday June 16). A taxpayer who chooses this option can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2014 tax year. If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2014, he or she will of course receive a refund on filing.
Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2013 tax year. Where a taxpayer’s income has not changed between 2013 and 2014, and his or her available deductions and credits remain the same, the likelihood is that their total tax liability for 2014 will be slightly less than it was in 2013, owing to the indexation of tax brackets and personal tax credit amounts.
Third, the taxpayer can estimate the amount of tax which he or she will owe for 2014 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2013 to 2014, and where there will consequently be a reduction in tax payable, this option may be worth considering. A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2014 tax year is filed in the spring of 2015. However, should instalments paid have been paid late or insufficient, the Canada Revenue Agency will impose interest charges at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2014, until March 31, 2014, 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 impose penalties but this 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. It should still be noted that 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.
