If for any two of three consecutive taxation years, your “net tax owing” is more than $3,000 (or $1,800 if you are a Quebec resident) after you file your personal income tax return, you can expect that the Canada Revenue Agency (“CRA”) will request that you pay your current year’s income tax in quarterly instalments. “Net tax owing” is your net federal and provincial taxes, less any income tax withheld at source. And, if you are self-employed, your instalments must include any CPP contributions and voluntary EI premiums.
Why am I required to make instalments?
Tax instalments are required if you earn significant amounts of income that does not have tax withheld and remitted to the CRA before you receive it. These sources of income are typically rental income, investment income, capital gains and self-employment income.
Once you receive an instalment reminder from CRA unless your net tax owing for the current tax year will be $3,000 or less, you will be charged interest and penalties if your required instalments are not paid by their due dates or if you make instalments based on your own estimate, but your estimate turns out to be too low.
When are my instalments due?
Generally, your instalments are due on the 15th of March, June, September, and December. If you are a farmer or fisher, you pay only a single instalment, which is due on December 31.
If any of these dates are a Saturday, Sunday, or a holiday, your instalment is not due until the next business day.
The CRA estimates your instalments (using the No-Calculation Option described below) and sends you instalment reminders. For the first year you are required to make instalments, the reminder is sent in August for instalment payments in September and December. For future years, reminders are sent in February (for your March and June instalments) and again in August (for your September and December instalments).
How much do I have to pay for 2023?
You can choose your instalments based on any of these three options:
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No-Calculation Option: Under the No-Calculation option, the CRA calculates your 2023 instalments for you and provides the amounts in the instalment reminders. Unless this is your first year of instalments, your March and June instalments would each be equal to one quarter of your 2021 net tax owing and your September and December instalments would each be equal to one quarter of your 2022 net tax owing.
An advantage of this option is that, by paying the amounts provided in the reminders by their due dates, you cannot not be charged any interest or penalties, even if it subsequently turns out that the instalments do not fully cover your 2023 net tax liability.
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Prior-Year Option: Under the Prior-Year Option, you must calculate your 2023 instalments yourself. Each instalment should equal one quarter of the total of your 2022 net tax owing. Note, however, if you reduce your instalments below amounts for the no-calculation option, and you underpay based on actual tax owing, CRA would charge interest on the shortfall.
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Current-Year Option: Under the Current-Year Option, you calculate your 2023 instalments yourself. Each instalment should equal one quarter of the total of your estimated 2023 net tax owing. As with the Prior-Year Option, you risk interest charges on any underpayment based on your actual tax owing.
Which option should I use?
You want to use the option that ensures you are neither overpaying nor underpaying your 2023 instalments.
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The instalment reminders you receive from the CRA are always based on the No-Calculation Option. Use it if your 2023 net tax payable will be close to your 2022 and 2021 amounts. However, if your 2023 net tax payable will be lower, you are overpaying, and this overpayment is not returned, without earning any interest, until you file your 2023 income tax return in April 2024. So, in this situation, you may be better off using options 2 or 3.
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If your 2023 net tax payable will be close to your 2022 amount, but significantly lower than in 2021, use the Prior-year Option.
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If your 2023 net tax payable will be significantly lower than in 2022 and 2021, use the Current-year Option.
Do you need help with your 2023 income tax planning? The experienced team of professionals at Ernst and Company CPA is available for personalized assistance. Please contact us today.
