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Paying income tax instalments
April 8, 2019
11:35 am
savemoresaveoften
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There is no one solution that fits all and make everyone happy. Quarterly installment seems a logical middle ground in my mind. And since CRA has no way of knowing how much you may/will make coming year, using last year as an estimate is not wrong either. If one believe their income will be significantly less than what CRA predicts, one can choose to ignore the installment or pay what they think is the "real" amount. Obviously if you end up under-estimating your own tax liability, you will pay a penalty. On that front, again, think CRA is fair cuz you are better off IF you actually way more than what they "predicted" that year.

Certainly not defending CRA as I dont enjoy paying tax either. But their approach re tax installment is not flaw in my mind. If anything I find filing T1135 even when all foreign assets are held within Canadian dealer a nuisance and I cant see any real benefits for doing so. Also T1135 should be related to foreign properties as in houses, non liquid assets AND any liquid assets held OUTSIDE Canada only...

April 8, 2019
12:32 pm
toto
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I just pay the 'no calculation method 'when cra sends me my installments notice.

April 8, 2019
4:57 pm
Bill
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When I first started getting CPP I set it up to withhold 60% (I think, or maybe it was 50%) as taxes so that's been my way of paying instalments. Also, as I've noted here before, I randomly just transfer money to them via MyAccount sometimes, they're happy to take money any time.

Not sure what loan shark rates these days are but I believe CRA's current interest rate charged is 6%.

April 8, 2019
6:51 pm
Bill
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Kidd, the interest rate is 6%.

The screen shot you provide is an additional penalty amount that is only applied if your 6% interest for the year in total exceeds $1000.

Easy to avoid both: follow the rules, pay on time, and don't make all the other taxpayers fund gov't operations while we all wait for late payers.

April 8, 2019
10:10 pm
Loonie
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AltaRed said

My ex was late with either a June or September installment payment a few years back. CRA charged her interest.  

Did your ex still owe more money at filing? That would trigger the interest for sure, but are you saying they were charged immediately after missing a payment?

Let's say you were subject to the quarterly payment system, and believed your income would be significantly lower this year as compared to last year. So, you decided that you could ignore the quarterly payment requirement because you were getting sufficient deductions from CPP, OAS and perhaps a pension plan or RIF. Then, later in the year, you got an unexpected short term contract, and your income suddenly went up. At that point you decided to make an online contribution to CRA which would cover the shortfall.
Are you saying that you would be penalized?

If, on the other hand, you had managed your tax payments in the manner Bill suggests, with some automatic deductions and some voluntary payments, and had thus never owed more than 3K at the end of the year and were not subject to the quarterly plan, there would be no problem with the above example, even though your payment schedule might be identical, and you would not be subject to fines.

Is that right?.

April 9, 2019
4:47 am
Bill
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Your requirement to pay instalments in a current year is determined by previous years' data, so there is no option to "ignore the quarterly payment requirement" in the current year because you think this year's net tax owing will be under $3000. Interest will apply if any quarterly payments are not made on time, though I've found there might be some leeway on that as I think I might have underpaid a bit sometimes or been a bit late and I can't recall any interest charges (not sure, I don't pay that close attention to every notice I get from them). Is my understanding.

April 9, 2019
5:29 am
pwm
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I've been on installments for serval years, and my wife will too, starting next September.
Just a minor factoid:
It's not actually true that you go on installments if you owe >$3k. It happens if you go over in two of the last three years. Or two years running if you like. One could be over from time to time and not ever go on installments.

April 9, 2019
4:02 pm
Bill
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I need to correct my post #27 above. Gov't site indicates:

"You have to pay your income tax by instalments for 2019 if both of the following apply:
your net tax owing for 2019 will be above the threshold for your province or territory ($1,800 or $3,000)
your net tax owing in either 2018 or 2017 was above the threshold for your province or territory".

So if your current year's net taxes owing at year-end will exceed $3K plus one of the two previous years was the same, you have to make instalments in the current year. So I guess if you assume your current year will not surpass the $3K (and thus make no instalment payments) and you end up being wrong then you'll pay interest (and possibly penalty) based on the quarterly amounts and dates you should have remitted in the current year.

However, it's all very confusing when you read all the info. For example, they say you may be charged interest, and maybe penalty too, only if you're previously received an "instalment reminder". So I guess there's no interest or penalty unless they previously gave you a heads-up about your requirement to make instalments.

Reading this material again reminds me of why I gave up on instalments and now just send them money on an early, regular basis to engineer a $2K or so refund when all is said and done. Just to be safe, don't want to have them chasing me for money.

April 9, 2019
4:28 pm
AltaRed
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Loonie, re post 26, I don't remember the specific circumstances but the specific penalty was on the NOA she received after filing taxes. CRA told her she owed some extra money and why. I never saw the NOA. Just what she told me.

April 9, 2019
5:40 pm
Loonie
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Thanks, Bill and AltaRed.
There are obviously still areas of uncertainty, which is why I raised the questions above.

I'm going to try to keep out of their hair with pre-authorized deductions if I can, after i've finished draining the RIFs.. I just don't like the idea of being required to do something like this. It's a nuisance; and a POA (or even myself as my wits start to fail!) might not be aware or realize the implications.

April 10, 2019
6:27 pm
savemoresaveoften
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My understanding is you end up paying interest and late penalty ONLY if you end up owing more than 3k AFTER all installments that you pay or ignore.

So if you have been assigned 4 equal installments of $1k each, you can pay it all at the end of the year as a $4k lump sum instead of 4x $1k installment, and you wont be charged interest or penalty as long as net owed after all installments are less than $3k ?

Similarly, if you are assigned 4 equal installments of $5k each, and you ended up paying $10k total installment only, you wont be charged interest and penalty either as long as you real tax is less than $13k ?

Maybe the CRA / tax accountant out there can verify ? This is a question that I wont trust the person that picks up the phone at CRA "hotline" number

April 11, 2019
1:18 am
Kidd
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Save more...

I am not sure that's how it works?

If i am told by the cra to pay tax installments in 2019, of $1,000 per quarter as in your example, which is paid on time as instructed. Then come my income tax filing in April 2020, i owe an additional $8,000 in tax. I do not believe i'm charged interest on that $8,000. I think my installments would be increased from $1,000 a quarter to $3,000 a quarter for 2020

Then come the following April 2021, based on my tax return for 2020, my installments may be adjusted again, either higher or lower.

But what i have learnt over the years... there are always two ways to do things, my way or the right way.

Added edit.

As per my original post, post 1.

I owed a good 5 figures for a couple of years, before i was put on the installment plan. I paid no interest on what i owed because i paid it all upon the April filing. BUT in the year they put me on installments. I first paid 5 figures upon the April filing, THEN i was billed another 5 figures in that same year and i was allowed to pay that bill in two (2) payments. So in that year, i paid taxes basically twice. Taxes owed for the last year and taxes for the current year.

April 11, 2019
4:17 am
savemoresaveoften
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Kidd said
Save more...

I am not sure that's how it works?

If i am told by the cra to pay tax installments in 2019, of $1,000 per quarter as in your example, which is paid on time as instructed. Then come my income tax filing in April 2020, i owe an additional $8,000 in tax. I do not believe i'm charged interest on that $8,000. I think my installments would be increased from $1,000 a quarter to $3,000 a quarter for 2020

Then come the following April 2021, based on my tax return for 2020, my installments may be adjusted again, either higher or lower.

But what i have learnt over the years... there are always two ways to do things, my way or the right way.

Added edit.

As per my original post, post 1.

I owed a good 5 figures for a couple of years, before i was put on the installment plan. I paid no interest on what i owed because i paid it all upon the April filing. BUT in the year they put me on installments. I first paid 5 figures upon the April filing, THEN i was billed another 5 figures in that same year and i was allowed to pay that bill in two (2) payments. So in that year, i paid taxes basically twice. Taxes owed for the last year and taxes for the current year.  

u r right, CRA wont charge interest as long as you pay what they set as your current year installment. I will change my example in my previous post to reflect.

April 11, 2019
6:34 am
Bill
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Kidd, I agree, that's my understanding. As long as you use one of the 3 acceptable methods of calculating your instalments (the no-calculation method being easiest as it's based on instalment reminders you get from CRA) and pay each instalment on time (not all at the end of the year, for example) then you're fine re instalment interest/penalty. And as long as you pay any additional taxes owing by the end of the following April you will also have no interest on that additional tax either. I suppose in that following year your first one or two quarterly instalments will stay the same but they might go up for the last two quarters if your previous year's tax assessment triggers an increase in subsequent instalment amount calculation.

I think toto summed it all up succinctly in post #22 - just do what they say and you'll spend no time on this plus have no problems with CRA.

April 11, 2019
10:04 am
AltaRed
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Bill said
I think toto summed it all up succinctly in post #22 - just do what they say and you'll spend no time on this plus have no problems with CRA.  

Indeed, and pay the installments on time to avoid the late filing charge my ex had a few years ago. It was minor but a nuisance to have to deal with. There is no substitute for just doing exactly what the installment request says.

April 11, 2019
10:23 am
Loonie
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True, but this doesn't cover the question of planning to avoid being billed for quarterly payments in the first place. How best to do that is my question.

April 11, 2019
10:42 am
Bill
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The conditions to avoid instalments are noted above, i.e. if you don't want to make instalments in 2019 don't have both the following:

1. Don't owe > $3K when filing your 2018 return, and
2. Don't have owed > $3K when you filed either 2016 or 2017 returns.

April 11, 2019
1:14 pm
frizun
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If I deal with this situation,it will be when I start withdrawing RSP money.
Can you ask the FI to increase the withholding tax on the money you withdraw?...that would keep me off the installment merry-go-round?

April 11, 2019
2:04 pm
Londonguy
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Loonie said
True, but this doesn't cover the question of planning to avoid being billed for quarterly payments in the first place. How best to do that is my question.  

FWIW I use a simple homegrown spreadsheet to estimate my taxes for the year, updating it monthly with known data to improve the accuracy of the estimate as the year unfolds. I voluntarily make quarterly installments, typically earlier than required, making adjustments up or down to the remittance amount as necessary, and I always make sure that my Q4 payment puts me into a small credit position for the full year which gets recovered when I file. Have never been issued a CRA order to pay installments, most likely because I've never been behind.

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