Pay tax in­stal­ments or bear the cost

If you do not pay tax no­tice, you face in­ter­est, penalty charges

The Guardian (Charlottetown) - - BUSINESS - This col­umn, writ­ten and pub­lished by In­vestors Group Fi­nan­cial Ser­vices Inc. (in Québec - a Fi­nan­cial Ser­vices Firm), and In­vestors Group Se­cu­ri­ties Inc. (in Québec, a firm in Fi­nan­cial Plan­ning) presents gen­eral in­for­ma­tion only and is not a so­lic­i­ta­tio

You may have re­ceived a re­minder no­tice from the Cana­dian Rev­enue Agency (CRA) in­di­cat­ing that you should make a quar­terly tax in­stal­ment. It is im­por­tant to make these pay­ments on time be­cause ig­nor­ing the no­tice may be costly.

You may have to make tax in­stal­ments if you re­ceived or earned any in­come that is not sub­ject to with­hold­ing at source, such as busi­ness or in­vest­ment in­come and/or if you re­ceived or earned in­come with a low rate of with­hold­ing at source, such as pen­sion in­come and your net tax ow­ing is greater than $3,000 in 2015 and ei­ther 2014 or 2013.

The CRA de­ter­mines if you must pay in­stal­ments based on your tax re­turns from prior years and will send you a re­minder no­tice to make these pay­ments — in Fe­bru­ary for the March and June pay­ments and in Au­gust for the Septem­ber and De­cem­ber pay­ments. If you re­ceive a re­minder no­tice but you do not com­ply you may be sub­ject to in­ter­est and penalty charges.

For the 2015 tax­a­tion year, the CRA will base your first two in­stal­ments on your 2013 tax li­a­bil­ity with the fi­nal two be­ing ad­justed so the to­tal of the four in­stal­ments equals your 2014 tax li­a­bil­ity. This cal­cu­la­tion method can re­sult in an over­pay­ment of tax if, for ex­am­ple, your in­come has de­creased over the past two tax­a­tion years. If you over­pay, you will earn in­stal­ment credit in­ter­est that is not re­fund­able and can be used only against in­ter­est pay­ment charges on late pay­ments for the same tax year. (Check with your ad­viser or ac­coun­tant be­fore mak­ing a pay­ment to see if your in­stal­ments should be re­duced.)

If you do not make your pay­ments on time or paid less than you had to pay, you will be charged in­stal­ment in­ter­est at the pre­scribed in­ter­est rate com­pounded daily (cur­rently at 5 per cent, which is sub­ject to quar­terly ad­just­ments) with the in­ter­est cal­cu­lated on each in­stal­ment pay­ment be­gin­ning from the day it was due.

You may also have to pay a penalty (if your in­stal­ment in­ter­est charges for 2015 are more than $1,000). The amount of the penalty is de­ter­mined by which of the fol­low­ing amounts is higher: • $1,000 or • 25 per cent of the in­stal­ment in­ter­est you would have to pay if you had not made in­stal­ment pay­ments.

To cal­cu­late the penalty, the CRA sub­tracts the higher amount from your ac­tual in­stal­ment in­ter­est charges for 2015 and di­vides the dif­fer­ence by two. The cost of not mak­ing your in­stal­ment pay­ments can be sub­stan­tial — it may even make sense to bor­row to pay the in­stal­ments. But don’t rush into another un­nec­es­sary ex­pense, es­pe­cially if you know your in­come is de­creas­ing.

Talk to your pro­fes­sional ad­viser about the best tax plan­ning and in­vest­ment de­ci­sions for you.

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