Simplified Instalments if You Have the Cash
If you’re required to make Canada Revenue Agency (CRA) instalment payments for personal or corporate income tax, or GST/HST, there may be a simple way to make those payments easier to manage.
The strategy is worth considering only if you have ample cash available and aren’t concerned about running short during the year.
When are instalments due?
Instalment schedules vary depending on the type of tax:
- Personal income tax: generally paid quarterly.
- Corporate income tax: generally paid monthly, although certain small Canadian-controlled private corporations may qualify for quarterly payments.
- GST/HST: annual filers who are required to make instalments generally pay them quarterly.
Instalments are normally based on tax from a previous year. If your current-year tax will be lower, however, you may be able to base your instalments on that lower amount.
For personal income tax, the March and June instalments may be calculated using tax from two years earlier. This allows the CRA to issue an instalment reminder before your previous year’s return has been filed. The September and December amounts can then be adjusted based on the previous year’s tax.
What happens if you pay late?
The CRA charges interest when a required instalment is paid late. The applicable interest rate can change quarterly, so it’s important to confirm the current rate before relying on a calculation.
There is another side to the equation: paying an instalment early can generate offset, or “contra,” interest.
This offset interest is calculated against interest arising from late instalments. It isn’t paid to you as ordinary refund interest, but it can reduce the instalment interest you would otherwise owe.
For income tax, this treatment is provided under subsection 161(2.2) of the Income Tax Act. For GST/HST, it is addressed under subsection 280(3) of the Excise Tax Act.
How the strategy works
If the interest generated by your early instalment payments equals the interest charged on your late instalments, the amounts can offset each other.
That creates a potential planning opportunity for taxpayers with sufficient cash available. Rather than making several separate instalment payments throughout the year, an appropriately timed payment may simplify the process while reducing or eliminating instalment interest.
The calculation depends on the timing and amount of your required instalments, as well as the applicable CRA interest rates. Before changing how you make your instalment payments, speak with your tax advisor to determine whether the approach makes sense for your circumstances.
This article is provided for general information only and should not be considered accounting, legal, or tax advice. Your individual circumstances may differ. Contact your trusted advisor for guidance specific to your tax needs.
