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Paying income tax instalments
April 22, 2019
10:15 am
Oscar
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savemoresaveoften said

certainly planning withdrawal with the purpose of minimizing lifetime total tax paid makes sense and I fully support someone to spend the time and effort to do it. It is just that it really has nothing to do with increased withholding tax at source vs pay by installments. Oscar, Kidd and myself are simply saying it does not achieve any financial benefit via increase withholding tax.

Re pay by installments, you can simply put in post dated entries on your bank account, which is what I do.

The beauty I see in pay the installment amount is it guarantees you there wont be any interest nor penalties, which is something you mentioned as a potential financial hit too.

We are all good and trying to save as much of our hard earned money at the end of the day.  

Loonie is not yet trapped in the installment plan and is avoiding it by calculating withdrawl amount and adjusting withholding tax as needed from December RRIF withdrawl as suggested by AltaRed , if I understand her postion correctly. Even if it isn't financially advantageous it is easier. This way she just does her taxes at tax time and is done with it . This keeps her out of the installment trap so she won't need to formulate an exit plan either.
I don't see any beauty in pay the installment amount and I sure don't think Loonie finds the beauty in it eithersf-wink

April 22, 2019
10:23 am
cristunity
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savemoresaveoften said
Got a bit of a special situation (sort of):

Since my 2018 installments were high and as a result I am expecting a hefty refund for 2018 (filed my tax return last week).
Back in Feb, 2019 installments email were sent out asking for payment in Mar and Jun under the no calculation option. I made the Mar payment so far.
My question is since I am having a refund for 2018, and one of the 2019 installment option is 1/4 of the 2018 net tax owing, does it mean I can ignore the 2019 installements reminder ?
I will have to pay net tax on 2019 tho (From investment return, etc) This is a 100% certainty.  

The answer is no and yes.

First the no: you cannot ignore the CRA's installment numbers if you want to be in a guaranteed no interest/no penalty zone. It doesn't matter if your 2019 tax owing will be far less than your 2018 tax owing. (By the way, the reminder you get from the CRA in August will be using your 2018 tax numbers -- not your 2017 tax numbers -- and as such based on what you've said your installment amounts will be significantly lower vs. the reminder you received in February).

Now the yes: if you crunch the numbers on your end and figure out how much tax you'll owe this year, then you can use your own numbers for the next 3 payments this year (June, Sep and Dec). Just keep in mind that if you underestimate the bill, then you'll owe interest. It's 6% calculated daily. If the interest is more than $1000 you'll also be hit with a penalty.

Does this help?

April 22, 2019
10:29 am
Top It Up
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I agree with @cristunity's comment - you've been identified as someone who has to pay instalments - you can pay THEIR number or YOUR number, quarterly, as long as you don't miss the mark.

April 22, 2019
1:19 pm
savemoresaveoften
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"Prior-year option
This option is best for you if your 2019 income, deductions, and credits will be similar to your 2018 amount but significantly different from those in 2017.

You determine the amount of your instalment payments based on the information from your tax return for the 2018 tax year.
If you use the prior-year option and make the payments in full by their 2019 due dates, we will not charge instalment interest or a penalty unless the total instalment amount due you have calculated is too low. For more information, see Instalment interest and penalty charges."

Since my 2019 will be similar to 2018 and significantly lower than 2017 (why I get a big refund coming for the 2018 calendar year), think I can based my installment amount on 2018 income and ignore the Feb 2019 installment which is essentially 2017 numbers. Comes August when they issue the second half 2019 installment reminders, I should see Sep and Dec amount drop significantly hopefully.

On the safe side, may be better to pay Jun as they calculated as well (already pay the Mar one). This one I should be bullet proof in terms of no risk for penalty or interest charge.

April 22, 2019
2:37 pm
cristunity
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savemoresaveoften said
If you use the prior-year option and make the payments in full by their 2019 due dates, we will not charge instalment interest or a penalty unless the total instalment amount due you have calculated is too low.

In my opinion, the above messaging (which I know is from the CRA and not you, savemoresafeoftensf-wink) is a major source of confusion with the installment program.

Here is why: the prior year option and (what we can call the) CRA option are not created equal. The prior year option only shields you from interest/penalties if you don't owe tax. The CRA option shields you regardless.

In this sense, technically, if you don't use CRA option you can pick any year to base your payments on. Or you can use a magic 8-ball. If you end up owing money, the CRA will not care that your installment payments this year are the equivalent of your tax paid last year.

For example, let's say you paid $12k last year and make 4 installment payments of $3k this year (Mar/June/Sep/Dec). Next April, you file your taxes and owe $14k. You cannot say to the CRA: "well, I did the prior year option down to the cent, so don't charge me interest." If you owe, you owe.

In this sense, the prior year option should be called the prior year estimate -- because that's what it is. It's not an option if you want to guarantee that you won't owe interest and penalties.

April 22, 2019
4:47 pm
AltaRed
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Bill said
Norman1, the question was whether or not savemoresaveoften can ignore the 2019 reminders. My guess was that if they don't make instalments and end up owing more than $3K at tax return time in 2020 then they shouldn't have ignored the reminders. Are you saying something different?  

This is self-correcting by September's payment anyway. Savemoresaveoften should continue to pay the indicated June payment, just like in March, and CRA itself will adjust what needs to be paid (if anything) for Sept and Dec.

The issue is not the refund itself. It is the amount of refund relative to installment payments otherwise paid/payable.

Let's use an example: Assume 2018 installment payments totalled $10,000 and assume the refund due with this year's 2018 return is $6000. It does NOT mean that installment payments for 2019 are not due. It is that they should be re-adjusted to be $4000 for 2019, not $10,000. CRA will make that adjustment for Sept and Dec, so that only $4000 in total gets paid for 2019.

Thus the answer is NOT to stop making installment payments. Let it self-adjust come Sept and Dec. Sure, it means one has paid 'too early' for March and June, but the cost is minimal these days of low HISA rates.

My income can vary quite a bit year to year. I don't try to get cute with installment payment adjustments. An error is more costly than what one gains, and life is way too short to mess with a few cups of coffee of after tax interest.

April 22, 2019
5:12 pm
Norman1
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Bill said
Norman1, the question was whether or not savemoresaveoften can ignore the 2019 reminders. My guess was that if they don't make instalments and end up owing more than $3K at tax return time in 2020 then they shouldn't have ignored the reminders. Are you saying something different?

What I was trying to say is that one needs to look at tax owing, before instalments, to determine if instalments will be needed.

If one will owe $4,000 this year and has already made a $3,000 instalment payment in March, then one will still need to make installment payments. That's because "net tax owing" for tax year 2019 is still $4,000 and is over the $3,000 threshold.

"Net tax owing" for tax year 2019 does not drop under the $3,000 threshold to $4,000 - $3,000 = $1,000 from instalment already paid.

April 22, 2019
5:29 pm
Norman1
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AltaRed said


My income can vary quite a bit year to year. I don't try to get cute with installment payment adjustments. An error is more costly than what one gains, and life is way too short to mess with a few cups of coffee of after tax interest.

It may be a surprise and not an actual error.

A mutual fund sells some long-term holdings during the year realizing some hefty capital gains. December monthly statement arrives in January and one finds that the mutual fund had paid out a hefty taxable distribution in mid-December!

A company is successfully taken over in the middle of the year. With over 90% of shares tendered, the buyer exercises its right of compulsory acquisition for the remaining shares. One is forced to realize all the capital gains in that year.

April 22, 2019
9:23 pm
AltaRed
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Yes indeed. My ex had a surprise $10k capital gain in a REIT ETF due the takeout of AAR.UN in 2018 and I had a >$20k cap gain surprise holding AAR.UN directly.

April 25, 2019
5:46 am
savemoresaveoften
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Thanks cristunity for pointing out the difference between "prior year options" vs "CRA option". It can be a hefty penalty implication if ones not careful.
Thanks AltaRed for comfirming CRA will adjust installment amount for Sep/Dec after they process the 2018 tax return. I will pay the Jun installment as is.

As employment income is no longer the biggest source of income, capital gain etc can potential throw a curve ball when it comes to tax planning. It potentially makes annual income like a roller coaster year over year.

August 16, 2019
11:22 am
pooreva
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Buaaaa. Got hit by CRA 'installment'. I had 'deduction at source' for 2 years and CRA figured out I have to give them interest free loan instead of owning them...

How do you report these installments at tax time?

August 16, 2019
11:28 am
krwilson
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pooreva said
How do you report these installments at tax time?  

I use UFile and there is a section titled "Installments and tax transfers", you just plug in the number here and it comes off at the near end of your tax form.

August 16, 2019
11:30 am
AltaRed
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August 16, 2019
5:03 pm
pooreva
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Thank you very much both of you! TurboTax has the same option - line 476.

August 16, 2019
7:16 pm
deepcman
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If it makes you feel any better I also go hit with the installment notice two days ago. Grrrrr.
For 3 years I just paid at tax time but I guess they're short of funds and now want the tax free loan up front.

August 23, 2019
3:40 pm
toto
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Just got my installment reminder for Sept and December and if I pay the no calculation method I will overpay because my interest income will be lower this year with the way my t5's will drop.
I don't like to deviate from no calculation method so if I overpay , when I do my taxes in March do I get a refund , or do they keep the credit and apply it to my next installment.
I can't seem to find this info on the website, but I'm sure bloggers will know. I will overpay by about 900.00 .

August 23, 2019
4:03 pm
GR
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toto said
Just got my installment reminder for Sept and December and if I pay the no calculation method I will overpay because my interest income will be lower this year with the way my t5's will drop.
I don't like to deviate from no calculation method so if I overpay , when I do my taxes in March do I get a refund , or do they keep the credit and apply it to my next installment.
I can't seem to find this info on the website, but I'm sure bloggers will know. I will overpay by about 900.00 .  

When you file your annual income tax return, you would receive a refund, by default. If you prefer applying the overpayment to your future installments, you could choose that option when you submit your tax return.
I suppose you realize that you would be "lending the government money" without receiving any interest for the overpayments.

August 23, 2019
6:28 pm
toto
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Is it ok to alter the installment in September or December to reflect my true tax balance owing.

August 23, 2019
6:59 pm
Norman1
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toto said
Is it ok to alter the installment in September or December to reflect my true tax balance owing.

That would the current-year option described in CRA: How do you calculate your instalment payments?

That would be okay if the altered installments end up truly reflecting the balance owing for the year:

If you use the current-year option and make the payments in full by their 2019 due dates, we will not charge instalment interest or a penalty unless the amounts you estimated when calculating your total instalment amount due were too low. For more information, see Instalment interest and penalty charges.

August 24, 2019
12:43 pm
toto
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Thanks Norman 1. I'm going to switch from no calculation method to current year method.
I guess I had in my head that cra would penalize me if I didn't pay the amount in the box.

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