Beginning tax payments by instalment
We look forward to our lives being simpler in retirement. But when it comes to income taxes, there is a wrinkle that most retirees will not have experienced before – instalment payments.
Reminders for instalment payments are sent from the Canada Revenue Agency (CRA) semi-annually in February regarding March and June due dates, and in August for September and December.
While receiving unexpected correspondence from the CRA may be a bit of a shock, there’s no need to panic. Paying taxes by instalment is not a matter of being unfairly targeted. No, it is simply an extension of employers’ payroll withholding and remittance during working years, which responsibility later rests upon retirees personally through quarterly instalments.
Who has to pay?
A standing feature of our tax system is the requirement for payers of certain amounts subject to tax to withhold and remit a portion to the CRA. Where an insufficient amount has been withheld (usually because the payer has limited information about the payee), the obligation then falls upon that payee.
Common situations include income from rent, non-registered investments, self-employment, multiple employers and – for our purposes – pension payments of various sorts.
The obligation is triggered if a person’s net tax owing was more than $3,000 in either of the two preceding years, and is expected to exceed $3,000 in the current year. (In Quebec, the threshold is $1,800.)
Calculating the instalment amount
There are three options available for calculating the amount of the quarterly instalment payments:
- Non-calculation option – By default, the instalment amount is based on the two preceding years’ income. The CRA will calculate this figure based on your tax records and include it in your semi-annual reminder correspondence. This option is most appropriate when income, deductions and tax credits are consistent from year to year.
- Prior-year option – If the current year is expected to be much like the prior year but significantly different from two years ago, this option is a better choice. In this case, it is up to you to calculate the instalment amount yourself. With your prior year’s Notice of Assessment or tax return in hand, you can fill in the required data on a calculation chart available through the CRA website.
- Current-year option – If the current year is unlike either of the two prior years, you can calculate the instalment amount using an estimate of your current year’s tax owing. For pensioners, this is likely most applicable in the first year or two of full retirement. As in option 2, the calculation chart can be used, though in this case as more of a guide in coming up with your estimate.
For options 2 and 3, any Canada Pension Plan (CPP) contributions for self-employment and voluntary employment insurance (EI) premiums must be added to the calculated tax owing. Of course, these will not apply to a full-time retiree.
The point of this exercise is not to come up with the least payment possible. Rather you are looking for the option that best estimates your actual/eventual tax liability. In fact, if you choose either option 2 or 3 and the instalment amounts are too low, CRA may charge interest and even levy penalties. (See Interest and penalties below.)
Making the payment
Payment can be made through online banking, by debit to CRA through My Account or My Payment, by mail or in person at your financial institution.
The mailed reminder from CRA will include Form INNS3, Instalment Remittance Voucher. This form is not required for online payment types, but should be stamped when paying at your financial institution and enclosed when making payment by mail (though a cover note with your Social Insurance Number may be sufficient to assist in proper processing of mail payments).
Instalments are due the 15th of March, June, September and December. If any of those dates fall on a weekend or public holiday, the due date moves to the next business day.
Mailed instalments are considered paid on the postmarked date, in-person payments at your financial institution on the date stamped on your INNS3 and online payments on the date the amount is credited to the CRA. If payment by any method is post-dated, it is the later negotiable date that applies.
Interest and penalties
Making a mistake on a calculation or remittance date could be costly. Instalment interest is charged on late and insufficient payments from the respective due date, compounded daily.
The prescribed interest rate for overdue income tax is 5% for January to March 2015, and additional instalment penalties apply if interest charges exceed $1,000. Prescribed rates are adjusted quarterly, based on economic conditions.