So you’ve started a brand new business and it’s actually turning a profit sooner than you expected. Things are going well, but something comes to mind.. you haven’t paid any tax on your income yet. No worries though, the government will reach into your pocket sooner or later and it’s best that you are prepared.
If you are a salaried worker, you’re accustomed to having taxes withheld from your pay check every couple weeks. However, business income usually does not have tax withheld, which means it’s up to the business to have the cash available when the tax liability is due.
When my accountant and I filed my business taxes for 2008, I owed a fairly significant amount in taxes. As the government expects to be paid for any money owed to them on a regular basis, they expect quarterly installment payments in future years.
How do they base these payments?
If you have a net tax owning of greater than $3,000 in the current year and either of the previous two years, then CRA will expect quarterly installment payments. There are a few choices as to how much is paid which I have listed below. More details can be found on the CRA website (with examples).
1. No-calculation option – Best if your income/deductions stay the same from year to year.
We will provide the no-calculation option amounts on the instalment reminders that we will send you in February and August 2009. If you choose this option, just pay the amounts shown on the reminders by each due date.
2. Prior-year option – Best if income/deductions are similar to previous year, but substantially varied from 2 years back. Basically divide last years tax owing by 4 to figure out current year installment payments.
If you choose this option, you have to calculate your instalment payments based on your prior-year (2008) net tax owing and any CPP contributions payable. Use the calculation chart to help you calculate your total instalment amount due and pay one-quarter of this amount on each instalment due date.
3. Current-year option – This option is if the current year income/deductions are significantly different than the previous 2 years.
If you choose this option, you have to calculate your instalment payments based on your estimated current-year (2009) net tax owing and any CPP contributions payable. Use the calculation chart to help you calculate your total instalment amount due and pay one-quarter of this amount on each instalment due date.
A sole proprietor may want to contribute a little more of their business income into an RRSP to reduce taxes owing under the $3,000 threshold. This will eliminate the need for installment payments in the following year.
When are installments due?
Installment payments for 2009 are due March 15, June 15, September 15, and December 15 (every quarter).
How are installments paid?
There are a few ways to pay tax installments, but the easiest is via electronic bill payment online. Simply login to your online banking site, click bill payment, and do a search for “CRA” as the payee. From that list, you should see “instalments, arrears, payment on filing”.
As with any late payment, there are penalties. The government is pretty tough when it comes to money owed to them – too bad they don’t pay interest on tax refunds. Here are the conditions for penalties when it comes to tax installment payments:
We charge instalment interest if all of the following conditions apply:
- we send you an instalment reminder in 2009 that shows an amount to pay;
- you are required to make instalment payments in 2009 (see Who has to pay by instalments?) and
- you do not make instalment payments, or you make payments that are late or less than the required amount.
We calculate the interest on each instalment that you should have paid using the payment option that calculates the least amount of interest. Then we calculate the interest on each instalment you did pay. We charge the difference between these two amounts only if the difference is more than $25.
There you have it, a brief summary of how income tax installment payments work. If you owe more than $3,000 in income taxes in the current year and either of the two previous years, then chances are, you will have to make installment payments.