Paying income tax every quarter
If you earned rental, investment or self-employment income, or realized capital gains in your non-registered account over the past couple of years, you may have just received your August 2016 instalment reminder, either in paper form or via email notification, from the Canada Revenue Agency.
The notice indicates that the next instalment payment is due on Sept. 15, 2016. But before paying the amount on the notice, take a moment to review the instalment rules to see if you really need to make the payment.
Instalments are meant to cover tax that you would otherwise have to pay in a lump sum next April 30. Instalments represent recurring income tax payments that you’re required to make during the calendar year in which you are earning taxable income not subject to tax withheld at source.
Under the Income Tax Act, quarterly tax instalments are required for 2016 if your “net tax owing” this year will be more than $3,000 ($1,800 for Quebec tax filers) and was also greater than $ 3,000 in either 2015 or 2014.
There are three methods for determining the amount you owe in instalments for 2016: ❚ With the no- calculation option, the CRA calculates your March and June instalments based on 25 per cent of the net tax owing on your 2014 assessed return. If you follow the no- calculation method and pay on time, no interest or penalties will be assessed by the CRA, even if you end up owing more money when you file your 2016 return next spring. ❚ The prior- year option bases the calculation solely on your 2015 income. You calculate your 2016 instalments based on your 2015 tax owing, and pay 25 per cent of the amount on each instalment date. ❚ Finally, under the current- year method, you are entitled to base your 2016 instalments on the amount of estimated tax owing for 2016. You pay one-quarter of that amount on each of the four instalment dates.
Note that if you only received an i nstalment reminder in August and the reminder didn’t mention March or June 2016 instalment payments, under the no- calculation option, you simply pay the amounts shown in box 2 of your reminder for Sept. 15 and Dec. 15. Under the prior-year and current- year options, you would calculate or estimate, respectively, your 2015 net tax owing and pay 75 per cent of the total on Sept. 15 and 25 per cent on Dec. 15. By following these simple rules, you may decide that instalments are not required after all or, if indeed required, minimize any instalment interest and penalties.