Unlike most individuals who receive a salary from their employer that is subject to income tax withholding, individuals who are self-employed, receive a pension or earn investment income such as rent, interest, dividends and capital gains do not generally have income tax deducted at source.
To level the playing field, the Canada Revenue Agency (CRA) and Revenu Québec (MRQ) require most of these individuals to make quarterly instalments during the year by the 15th of March, June, September and December.
There are three alternate methods of calculating instalments, and individuals can choose either of the three, depending on which method is most advantageous to them, bearing in mind that underpayment can result in interest charges.
1. No Calculation Tax Instalment Option
The CRA and MRQ will calculate and propose an amount for your March and June instalments based on 25 per cent of the net tax owing two years prior. They will then calculate the remaining two instalments based on your prior year’s tax. Every year, in February and August, the CRA and MRQ send out reminders of these amounts to individuals required to pay instalments.
Note: When in doubt, this is the safest option.
If your income not subject to withholdings is increasing or your deductions are decreasing, it will be beneficial to use this option and pay the remaining balance by April 30 of the following year.
2. Prior Year Tax Instalment Option
Make payments equal to one quarter of your prior year’s tax by the four required payment dates.
Note: This option is best if your prior year’s tax is less than the year before, and you do not anticipate your current year’s tax to decrease significantly.
3. Current Year Tax Instalment Option
Estimate your current year’s tax and pay instalments of one quarter of this amount on each instalment date.
Note: This option is best if you estimate your current year’s tax to be significantly lower than in prior two years. However, this is the method that is most likely to result in interest if your estimate is incorrect. If your instalment payments are late or insufficient, you may incur interest and penalties. CRA and MRQ charge interest on all late or insufficient tax instalment payments compounded daily at the prescribed interest rate.
If you miss a payment or pay late, you can reduce or eliminate interest and penalties by overpaying your next instalment payment paying your next instalment early.
There are several payment options with different processing times for each: online, in person, at a financial institution or by mail. Online payment is the most efficient way to make a payment. If you are paying by mail, make sure to include the official government remittance voucher with the cheque.
Once you make a payment, you should keep proof of payment until reflected in your online accounts with both governments or you receive your instalment payment summary, usually in February.
We’re Here to Help
Still unsure which calculation method to use? Have other questions related to your tax instalments? Please do not hesitate to contact one of our tax team members.