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Paying income tax instalments
April 11, 2019
3:30 pm
AltaRed
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frizun said
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?  

Indeed. That is a reasonably well known strategy. Some people have had almost 100% withheld at source to effectively eliminate their tax balance owing at the end of April, or to keep it below the $3k threshold. Do it early in December to get the most mileage out of the year's investing time. I intend to have 90% withheld once I convert to a RRIF in 2020.

April 11, 2019
7:21 pm
cristunity
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I'm not an accountant (and don't play one on TV), but here is my understanding of the CRA's installment system:

The base it in the last 2 tax years. The first 2 payments (March and June) are based on 50% of the tax bill from 2 years ago. The second 2 payments (September and December) are based your tax bill from 1 year ago, minus the amount that was paid in March and June.

So for example, let's say you owed $20,000 in tax in 2016, and 15,000 in tax in 2017. In February 2018, you would have received an offer from the CRA to pay $5,000 in March 2018 and $5,000 in June 2018 (50% of your 2016 tax bill).

Then in August -- and after you had filed your 2017 tax return -- you would have received another offer from the CRA to pay installments of $2,500 in September and $2,500 in December (your tax bill in 2017 was $15,000 and you paid $10,000 in installments already, which means you would owe $5,000 for the remainder of 2018 split into 2 installments).

When you file your 2018 taxes, if you owe less than $15,000 then you'll get a refund for the difference. I'm pretty sure there is no interest award here.

If you owe more than $15,000, provided that you pay the balance by April 30, 2019, then you won't be charged any interest. Even if you owe $40,000 in tax (or some other number). As long as you used the CRA's numbers to make installments, you're in a safe zone.

However, if you owe tax and you didn't use the CRA's numbers (and you don't have to tell them when you don't use their numbers), then you will owe interest. This is currently at 6% and calculated daily.

So, if you paid $5,000 for the CRA's first installment date (March 15, 2018), but you ultimately should have paid $15,000 (or any other number higher than $5,000), then you are charged daily interest from March 16 to whenever the CRA gets the money.

The same formula is used for the installment in June, September and December.

That is why the CRA recommends that if you decide to use your own numbers, and then realize part-way through the year that you are going to owe tax when you file, that you should pay your installments early and/or at a higher amount.

If you do, then you will earn interest on the overpayment (not 6% -- I think it's 2%?). However, when you file you will not get this interest back in cash. Rather, this interest your earn will offset any interest you owe. So if you're on pace to owe $500 in interest and you earn $200 interest by paying your installments early/higher, then you will owe $300 in interest.

On top of this, if you owe more than $1000 in interest, then you are also subject to a separate penalty. The formula for this is on the CRA's website here.

I hope this helps.

If I am wrong about anything here I would appreciate being corrected.

April 11, 2019
7:55 pm
Loonie
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Londonguy said

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.  

Thanks, Londonguy. That's the kind of real life experience I have been looking for.
The question that remains is, could you hold off and just make one payment towards the end of the year? According to the rules, as cited by Bill, and with which I agree, it ought not to be a problem unless you miscalculate by 3K+.

April 11, 2019
9:07 pm
Oscar
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Londonguy said

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.  

Londonguy , your post has brought this thread full circle. You are paying them installments to avoid having to pay installments . I'm not saying there's anything wrong with that as your choice . But I just want to point out what you said in your last sentence as the typical mindset regarding this matter. If you never paid them in advance you may have been issued an installment order but not because you were behind,but because they would then demand you pay it in advance as you are doing now.
Norman1 also provides another example when he uses the withholding of payroll taxes as installment payments. In that scenario , if one were to have sufficent RRSP contribution room and made an RRSP contribution to offset taxes due which resulted in a refund then that money was never due. It was never due because it would only be due on April 30 of the following year. I have never seen 6% interest included in my refund.
Now if they paid interest ( at the same rate as they charged on arrears on money that was due in advance ) on money that was collected in advance and refunded after assessment ,that would be the proper way to settle the accounts but for some reason it hasn't dawned on them yet. Or more precisely , us.

April 11, 2019
9:43 pm
Norman1
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Loonie said


The question that remains is, could you hold off and just make one payment towards the end of the year? According to the rules, as cited by Bill, and with which I agree, it ought not to be a problem unless you miscalculate by 3K+.

I don't think one can just pay the total installments required in one payment near the end of the year instead of by the installment dates.

Income Tax Act subsection 161(2) charges interest from the installment dates when installment payments are requried:

Interest on instalments

161 (2) In addition to the interest payable under subsection 161(1), where a taxpayer who is required by this Part to pay a part or instalment of tax has failed to pay all or any part thereof on or before the day on or before which the tax or instalment, as the case may be, was required to be paid, the taxpayer shall pay to the Receiver General interest at the prescribed rate on the amount that the taxpayer failed to pay computed from the day on or before which the amount was required to be paid to the day of payment, or to the beginning of the period in respect of which the taxpayer is required to pay interest thereon under subsection 161(1), whichever is earlier.

April 11, 2019
9:50 pm
Norman1
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Oscar said

Now if they paid interest ( at the same rate as they charged on arrears on money that was due in advance ) on money that was collected in advance and refunded after assessment ,that would be the proper way to settle the accounts but for some reason it hasn't dawned on them yet. Or more precisely , us.

The government used to do that. Taxpayers like me would overpay on purpose on April 30 to collect that generous rate of interest until the government got around weeks later to issuing the refund cheque.

Just imagine what would happen if a large company would (oops!) pay an extra $8 million into their tax account on April 30 and government had to pay 6% on that for a few weeks.

April 12, 2019
6:22 am
Bill
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To avoid paying interest:

If you're required to make instalments in a year then, no, you can't wait until the end of the year. You have to make your instalments by their due dates.

If you're not required to make instalments in a year then, yes, you can wait until near the end of the year, i.e. if you want to get your post-Dec 31 tax bill for that year under $3k before year-end in order to avoid having to make instalments next year. Though as we've noted, going over $3k in one year alone would not by itself trigger instalment requirements, have to look at previous 2 years too.

Separate issue: if you paid your instalments on time or if you're not required to make instalments, if you still owe more taxes after Dec 31 for the previous year you're ok as long as you pay them by April 30 of the following year.

toto knows the deal.

April 12, 2019
7:54 am
Londonguy
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Loonie said

Thanks, Londonguy. That's the kind of real life experience I have been looking for.
The question that remains is, could you hold off and just make one payment towards the end of the year? According to the rules, as cited by Bill, and with which I agree, it ought not to be a problem unless you miscalculate by 3K+.  

I'm pretty sure that you need to pay CRA at least quarterly, which I think is quite reasonable when you consider that most people are subject to immediate source deduction. After all, the government has to manage its cash flow just like everybody else. CRA has no mandate to let taxpayers use them for a bank -- quite the opposite, actually.

April 12, 2019
5:10 pm
Loonie
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Like you say, most people are subject to source deductions.
Some people, in retirement, are not, but those people are not sufficient to unbalance CRA's plans.
For the last several years, I have been paying way more in advance taxes than I owe, due to their rules about taxes on RSP/RIF withdrawals. They are quite happy to act like a bank as long as they are getting the benefit, so they should be equally wiling when it's not in their favour.

April 12, 2019
6:50 pm
Bill
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I feel like it's time for my regular reminder that our taxes are paid to someone called "The Receiver General" for whom the CRA acts as a tax collector.sf-smile

April 12, 2019
7:40 pm
Kidd
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Bill said
I feel like it's time for my regular reminder that our taxes are paid to someone called "The Receiver General" for whom the CRA acts as a tax collector.sf-smile  

Of which bought a 4.5 billion dollar pipeline and a pair of curly toed shoes. Without our donations, the governments of canada wouldn't have the money to waste.

April 13, 2019
12:27 pm
Norman1
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Kidd said

Looking ahead at 2019, i will receive the bulk of my investment return in December 2019, when the payment on an asset comes due. Up until that point in time, the cra tax installments come out of my living expense (that circle thing). Fortunately, i have the assets to pay the advance taxes in March, June and September.

From the government's perspective, it cuts both ways and evens out.

It is unfortunate that most of your investment returns will be realized in December 2019 and you'll have to pay tax installments on those returns before in March, June, and September. However, some luckier taxpayers could have most of their returns in March and not have to pay the tax installments on the returns until March, June, September, and December!

Taxpayers who are retailers, like Hudson's Bay, have been unlucky and have been dealing with situation for a long time. They actually lose money for the first three quarters of the year. It isn't until Q4, with the Christmas shopping season, that they recoup their losses for the year and earn their profit. However, they still need to make their quarterly installments on profits that may or may not actually materialize in December.

I wonder if GM charged their customers in advance, say 9 months before the expected delivery date... hmm, would that be an acceptable business practice? I had to get an auto reference in here somewhere just to support the cause and all.

It would be if GM offered 10% off the price of the car for paying in advance instead of on delivery. 10% for 9 months is quite a good return.

CRA is offering a similar deal. If one pays the installments on the installment due dates, one doesn't have to pay 6% interest on the installments owed.

April 13, 2019
12:39 pm
Norman1
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Bill said


If you're not required to make instalments in a year then, yes, you can wait until near the end of the year, i.e. if you want to get your post-Dec 31 tax bill for that year under $3k before year-end in order to avoid having to make instalments next year. …

I don't think that would work. I don't think instalment payments (mandatory or not), which are not withheld from source, will reduce the "net tax owing", defined in 156.1 (1), used to determine if taxes will need to be paid by instalments.

April 13, 2019
4:09 pm
Loonie
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Norman1 said

Bill said


If you're not required to make instalments in a year then, yes, you can wait until near the end of the year, i.e. if you want to get your post-Dec 31 tax bill for that year under $3k before year-end in order to avoid having to make instalments next year. …

I don't think that would work. I don't think instalment payments (mandatory or not), which are not withheld from source, will reduce the "net tax owing", defined in 156.1 (1), used to determine if taxes will need to be paid by instalments.  

Norman, could you be more specific, please. I can't find a section 156 at all.
It seems to go directly from 153 to 161.
https://laws-lois.justice.gc.ca/eng/acts/i-3.3/index.html

April 13, 2019
4:37 pm
Bill
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If you click on the section 153 link and go through the subsequent pages you'll find all the sections there.

April 13, 2019
4:50 pm
Loonie
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Thanks, Bill. Missed the pagination; vision failing.

So, this is what it says.

156 (1) Subject to section 156.1, in respect of each taxation year every individual (other than one to whom section 155 applies for the year) shall pay to the Receiver General

(a) on or before March 15, June 15, September 15 and December 15 in the year, an amount equal to 1/4 of

(i) the amount estimated by the individual to be the tax payable under this Part by the individual for the year<, or

(ii) the individual’s instalment base for the preceding taxation year, or

(b) on or before

(i) March 15 and June 15 in the year, an amount equal to 1/4 of the individual’s instalment base for the second preceding taxation year, and

(ii) September 15 and December 15 in the year, an amount equal to 1/2 of the amount, if any, by which

(A) the individual’s instalment base for the preceding taxation year

exceeds

(B) 1/2 of the individual’s instalment base for the second preceding taxation year.

I have underlined the portion that appears to be applicable, since I can't figure out how to highlight here.
slj dstl

Sounds to me like it is at the discretion of the taxpayer, depending on their "estimate". I know a lot of people who could never estimate this with anything approaching accuracy, some because they lack the skills and some because it is impossible to do so.

Do you really think CRA is going to nit-pick about our ability to make reasonable estimates? Doesn't sound like an argument worth pursuing to me. The Act doesn't specify that the estimates must be accurate or even reasonable. I could see it maybe for people who have reliable sources such as CPP or RIF annuities or minimums, but pension plans in my experience tend to ask you your estimated annual income and deduct accordingly. Investment income is not really knowable. OAS is clawable so may not be estimatable. If you just went on what is knowable where auto-deductions are controllable by you, CPP and RIF, it might not amount to much.
Further, I don't see anything that says they consider RIF taxes withheld but paid in December to offer an exemption.
I think they'd have to be a lot more specific in order to enforce this, but perhaps someone has an example?

April 13, 2019
5:24 pm
Bill
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Norman1, I see what you mean, the Act certainly seems to say that. (You don't think that "tax credits" in 156(1.1)(b) refers to "total credits" line 482 of the T1, which includes amounts entered on line 476, which is the only place you can report voluntary payments?)

Re instalments their website says "Generally, your net tax owing is the amount you owe on your tax return", key word of course being the first one. In any event, over the last year I've essentially replaced my voluntary payments with increased deductions from various pensions so I guess I won't be testing your what-looks-like-valid interpretation.

April 13, 2019
6:34 pm
Norman1
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Bill said
Norman1, I see what you mean, the Act certainly seems to say that. (You don't think that "tax credits" in 156(1.1)(b) refers to "total credits" line 482 of the T1, which includes amounts entered on line 476, which is the only place you can report voluntary payments?)

I think you meant paragraph 156.1(1.1)(b) instead of paragraph 156(1.1)(b).

I think the highlighted text in 156.1(1.1)(b) refers only to the tax credits related to the taxes, like the personal amount, the dividend tax credits on taxable dividends, and the pension tax credits on pension income:

Values of A and B in net tax owing

156.1 (1.1) For the purposes of determining the values of A and B in the definition net tax owing in subsection 156.1(1), income taxes payable by an individual for a taxation year are determined

(a) before taking into consideration the specified future tax consequences for the year; and

(b) after deducting all tax credits to which the individual is entitled for the year relating to those taxes (other than tax credits that become payable to the individual after the individual’s balance-due day for the year, prescribed tax credits and amounts deemed to have been paid because of the application of either subsection 120(2) or (2.2)).

If "net tax owing" did include instalment payments reported in line 476, then it would likely drop below $3,000 once instalment payments are made. After "net tax owing" of under $3,000 for two or more years in a row, one would no longer need to make instalment payments! sf-laugh

Re instalments their website says "Generally, your net tax owing is the amount you owe on your tax return", key word of course being the first one. In any event, over the last year I've essentially replaced my voluntary payments with increased deductions from various pensions so I guess I won't be testing your what-looks-like-valid interpretation.

Yes, that "Generally" qualifier is quite significant. I suspect CRA knows that "net tax owing" is not always the same as "Balance owing" on line 485.

April 13, 2019
6:56 pm
Norman1
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Loonie said

Sounds to me like it is at the discretion of the taxpayer, depending on their "estimate". I know a lot of people who could never estimate this with anything approaching accuracy, some because they lack the skills and some because it is impossible to do so.

Do you really think CRA is going to nit-pick about our ability to make reasonable estimates? …

That is correct: One can use one's own "estimate" instead. But, it is at one's peril.

If that "estimate" ends up being both (a) less than the payment suggested in the instalment reminders and (b) the final taxes owing, then interest will be assessed on the difference from the instalment payment dates.

That peril looks suspiciously like it comes from subsection 161(4.01):

Limitation — other individuals

161 (4.01) For the purposes of subsection 161(2) and section 163.1, where an individual is required to pay a part or instalment of tax for a taxation year computed by reference to a method described in subsection 156(1), the individual shall be deemed to have been liable to pay on or before each day referred to in subsection 156(1) a part or instalment computed by reference to

(a) the amount, if any, by which

(i) the tax payable under this Part by the individual for the year, determined before taking into consideration the specified future tax consequences for the year,

exceeds

(ii) the amounts deemed by subsections 120(2) [school allowances] and (2.2) [income tax payable to an Aboriginal government] to have been paid on account of the individual’s tax under this Part for the year, determined before taking into consideration the specified future tax consequences for the year,

(b) the individual’s instalment base for the preceding taxation year,

(c) the amounts determined under paragraph 156(1)(b) in respect of the individual for the year, or

(d) the amounts stated to be the amounts of instalments payable by the individual for the year in the notices, if any, sent to the individual by the Minister,

reduced by the amount, if any, determined under paragraph 156(2)(b) in respect of the individual for the year, whichever method gives rise to the least total amount of such parts or instalments required to be paid by the individual by that day.

The "own estimate" method from 156(1)(a) is not among the four methods listed.

April 13, 2019
7:05 pm
Bill
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Norman1, yes, I did mean 156.1, not 156. And, yes, I agree with what you say.

Here's CRA's 2019 calculation chart re instalments, and I think it indicates what they mean by credits:
https://www.canada.ca/content/dam/cra-arc/migration/cra-arc/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/Instalment_chart_fill-19e.pdf

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