Over the summer, the Canada Revenue agency extended the deadline for individuals, corporations and trusts to make tax payments, including instalment payments, to Sept. 30, 2020. For individuals, the extension applies to amounts owing on 2019 returns and instalments otherwise due on June 15 and September 15.
When are instalments required?
Under the Income Tax Act, quarterly tax instalments are required for 2020 if an individual’s “net tax owing” this year will be more than $3,000 ($1,800 for Quebec tax filers) and was also greater than $3,000 ($1,800 for Quebec) in either 2019 or 2018.
The definition of net tax owing is complex, but essentially refers to an individual’s net federal and provincial taxes, less income tax withheld at source, plus any CPP contribution and EI premiums on self-employment earnings (if applicable), as well as adjustments for certain other credits and social benefit repayments.
There are three methods used to determine how much an individual needs to pay each quarter: the no-calculation method, the prior-year method and the current-year method. Individuals can choose the one that results in the lowest payments.
No-calculation option
Under the no-calculation option, the CRA calculates the March and June instalments based on 25% of the net tax owing on the taxpayer’s 2018 assessed return. The Sept. 15 and Dec. 15 instalments are then calculated based on the net tax owing from the 2019 return, less the March and June instalments already paid. Provided the taxpayer sticks to the amounts the CRA tells them to pay and the instalments are remitted on time, no interest or penalties will be assessed, even if the taxpayer does end up owing some additional tax when they file the 2020 tax return next spring. If one’s income, deductions and credits don’t vary much from year to year, this is the simplest option.
Prior-year option
By contrast, the prior-year option bases the calculation solely on last year’s (2019) income. The 2020 instalments are based on the 2019 tax owing and the individual simply pays 25% of the amount on each instalment date. This option is best if 2020 income, deductions and credits will be similar to 2019, but significantly different than 2018. When instalment payments are made by their due dates, no instalment interest or penalties are charged unless the total instalment amount that was calculated is too low.
Current-year method
Finally, under the current-year method, taxpayers can simply base their 2020 instalments on the amount of estimated tax they think they will owe for this year. Individuals simply pay one-quarter of the estimated amount on each of the four instalment dates. This option is useful if the income source that gave rise to instalments in a prior year no longer applies. For example, if your client had a one-time sale of some securities last year but expects all 2020 income to have deductions taken at source, they may not need to make any 2020 instalments, despite receiving an instalment reminder from the CRA. This method can be risky because if it’s inaccurate and instalments made are lower than the no-calculation option above, arrears interest could be charged.
Action required
If you’re aware of significant capital gains (or losses) that a client triggered in 2019 or 2020 that could impact the upcoming instalments, consider being proactive and reaching out to your clients to remind them that they have several options when it comes to making the upcoming instalments.