Corporate Tax Instalments (Installments): How to Record Them

Do I have to pay corporate tax instalments, and are they monthly or quarterly?

A corporation generally pays its income tax in monthly instalments during the year and the rest after year end. Only a small Canadian-controlled private corporation (CCPC, a private corporation controlled in Canada) that passes the CRA's tests may pay quarterly, and some corporations pay no instalments (Income Tax Act, s. 157; CRA: instalment dates).

The quarterly tests cover the small business deduction, income and capital limits that count associated corporations (corporations linked by ownership or control, such as a holding company and its operating company), and an on-time filing and remitting record, checked each time an instalment falls due (Income Tax Act, s. 157(1.2)). The tests and the three ways to calculate instalments are in filing your corporate return. Monthly instalments fall due on the last day of each month of a calendar tax year, and quarterly ones on the last day of each three-month period. A year that starts mid-month has its first instalment due one month (monthly) or one quarter (quarterly) less a day after it starts. A corporation that stops qualifying for quarterly payments during the year may still pay its next instalment at the end of the current quarter and then pays monthly (CRA: instalment dates; Income Tax Act, s. 157(1.1) and (1.5)).

Whichever schedule applies, record each payment the same way: as a prepayment of the year's tax on the balance sheet, not as an expense, and set it against the year's tax at year end. The case is not simple when instalments were expensed or never recorded, when the books and the CRA account show different payments, when instalment interest has started, when a first big-profit year has made the instalments too low, or when you also pay Quebec or Alberta. Fix those before the T2 is prepared. Gather the last T2, the CRA account statement by tax year and the bank record of every payment to the CRA. The CRA does not issue instalment payment reminder notices, so the corporation works out its own amounts (CRA: T7B-CORP).

How do I record a corporate income tax instalment (installment) when I pay it?

A corporate income tax instalment is normally recorded as a prepayment of the year's tax, not as an expense. Debit an account such as "Income tax instalments" (a current asset) and credit the bank. An instalment is a payment on account of the year's tax (Income Tax Act, s. 157(1)); the expense is the year's tax, booked once at year end.

No official source gives account names, so this layout is bookkeeping practice built on the way the Act treats an instalment.

Record the payment on the day it leaves the bank, so the bank reconciliation ties. Keep the CRA's payment date in the memo: the day the CRA receives the payment, or the day a Canadian financial institution processes it, decides whether the instalment was on time (CRA: T7B-CORP). Note the corporation's tax year on each payment. The CRA account is kept by tax year, and a tax year need not match the calendar year.

If the owner paid the instalment from a personal account, credit the shareholder loan instead of the bank; the debit is the same. See business expenses paid personally and the shareholder loan account.

Expensing each payment and then booking the full tax again at year end counts the tax twice. If payments are already in an expense account, move them before the year-end entry:

A payment to the CRA for GST/HST or payroll belongs to those accounts, not here. See reconciling GST/HST payable.

How do I record the corporate tax for the year at year end?

Book the year's corporate income tax as one entry: debit current income tax expense, credit the instalments account for what was paid, and credit income tax payable for the rest. The CRA's General Index of Financial Information (GIFI), the standard account codes the T2 uses, puts current income taxes, federal and provincial, in item 9990 on the income statement, and unpaid taxes in item 2680, Taxes payable, on the balance sheet.

The T2 balance owing is total tax payable (line 770) less all the credits on lines 780 to 840, not only instalments (CRA: T2 guide). Other credits, such as an investment tax credit refund, a dividend refund or tax withheld at source, also reduce what is owing, so income tax payable must allow for them to match the T2. Ask the person preparing the T2 for line 770 and total credits (line 890). The examples below have no other credits.

GIFI 2680 also takes GST/HST payable. Keep income tax payable in its own account and map both to 2680, so each ties to its own CRA statement.

A corporation that books deferred income taxes (GIFI 9995) has a second entry. This page covers the current tax only.

Where does the year-end tax number come from, and how do I update it when the T2 is prepared?

The year-end federal income tax figure is the total tax payable on the T2 (line 770, per the CRA's T2 guide). Line 770 excludes Alberta and Quebec provincial tax, which comes from the AT1 or CO-17; keep each authority's instalments, credits and balance separate. The T2 is often prepared after the books close, so the books carry an estimate until it is final.

1. Ask the person preparing the T2 for the tax figure. Taxable income is not book profit; the T2 adjusts it for differences the tax rules create. See tax income versus book profit.
2. If you need a number sooner, estimate from book profit, adjusted for known differences, and the corporation's rates (how corporations are taxed). Label the entry an estimate.
3. When the T2 is final, post the difference to the same expense account and the same payable account. The GIFI description of item 9990 includes adjustments to a previous year's tax.
4. Tie the instalments. The year's payments in the instalments account, before the year-end entry, should equal line 840, Tax instalments paid, on the T2. If not, find the payment before the return is filed.

The financial statements and the T2 are normally finished together; see year-end financial statements. A later CRA reassessment is a new entry: see recording CRA reassessments.

How long after year end is the tax due, and how do I record the balance-due payment?

The balance of the year's tax is due two months after the corporation's year end, or three months after for a CCPC that meets the CRA's conditions. For a December 31 year end, that is the end of February, or the end of March when the three-month day applies; a date on a weekend or holiday is met by payment received the next business day. Both fall well before the T2, which is due six months after year end (CRA: balance-due day).

The three-month day applies when:

• the corporation is a CCPC throughout the tax year;
• it claimed the small business deduction for the current or previous year; and
• its taxable income for the previous year, measured before loss carrybacks, did not exceed its business limit (the cap on income eligible for the small business deduction; see how corporations are taxed). With associated corporations, their combined taxable income for their last tax years ending in the previous calendar year must not exceed their combined business limits.

Record the payment against the payable, not the expense:

The balance is due by the balance-due day even if the T2 is not ready, so it is paid on an estimate. Arrears interest runs on any unpaid balance from the balance-due day to the payment date and compounds daily, so a final tax above the estimate costs interest from the balance-due day, not from the filing date (CRA: understanding interest).

What if my instalments add up to more than the tax?

If instalments add up to more than the year's tax, the excess stays on the balance sheet as an income tax receivable until the CRA refunds it, transfers it or applies it to another balance. The CRA does not normally refund instalments until it has assessed the T2 (it may refund excess instalments earlier if paying them causes undue hardship and the corporation shows it, Income Tax Act, s. 164(1.51)), refunds an overpayment only if the account has no debt or missing return, and needs the T2 filed no later than three years after the tax year ends (CRA: T7B-CORP).

On the T2, refund code line 894 chooses: "1" or blank has the CRA send the refund, "2" moves it to next year's instalment account, and a letter attached to the return can ask the CRA to apply it to another liability (CRA: T2 guide).

GIFI item 1066, Taxes receivable, includes income tax refunds (GIFI). Interest the CRA pays on a refund is separate from the receivable and is normally booked as interest income.

How do I record instalment interest or an instalment penalty?

Record instalment interest and any instalment penalty each in its own expense account, apart from income tax expense, and credit income tax payable (or the bank, if paid). The CRA charges instalment interest on late or insufficient instalments, and may add an instalment penalty when that interest is more than $1,000 (CRA: T7B-CORP). Take the amounts from the CRA notice or account statement.

Keeping them out of tax expense lets that account equal the tax on the T2, and keeping them out of ordinary interest expense lets the T2 preparer find them. How they are treated on the T2, how the interest is worked out and whether it can be cancelled are in penalties, interest and relief. A year with much more profit than the instalments assumed can start instalment interest.

How do I check my books against what the CRA shows?

Compare the instalments account with the CRA account, one tax year at a time. The CRA's "View and pay account balance" service in My Business Account shows the interim balance, account balance and transactions, and the CRA issues a statement of account on request (CRA: T7B-CORP).

1. List every payment to the CRA in the bank records for the tax year, with date, amount and purpose.
2. Pull the CRA transactions for the same tax year.
3. Match each payment by amount and by the CRA's payment date, not the day it was sent.
4. Add what only the CRA shows: interest, penalties and any assessed balance.
5. Confirm the year's payments in the instalments account (before the year-end entry) equal the CRA's payments for the year. Before the T2 is assessed, the CRA's interim balance shows payments but not the year's tax, so the books' payable will not match it yet. After assessment, income tax payable should equal the CRA balance, once later payments, other T2 credits, interest and penalties are explained. Do not change tax expense just to force a match.

The CRA's guide says to make every effort to pay into the correct account, and the CRA allows transfers between tax years and to another account. When it moves a payment, move the entry in the books the same way (CRA: T7B-CORP).

I am in Quebec or Alberta: how do provincial instalments change what I record?

Quebec and Alberta administer and collect their own corporation taxes, so a corporation with a permanent establishment there pays that province directly (CRA: T7B-CORP). Keep one instalments account and one payable account for the CRA, and another pair for the province, each tied to its own statement. The expense can stay in one account (GIFI 9990 takes federal and provincial income taxes) or split by authority. The year's provincial figure comes from the province's own return: the AT1 in Alberta, the CO-17 in Quebec.

Alberta sets its own rules for Alberta tax (Alberta: corporate income tax):

A due date on a weekend or holiday moves to the next business day, and Alberta charges daily compound interest on late or deficient payments.

Quebec's dates and amounts are set by Revenu Québec, and this page states none. A corporation required to pay Quebec instalments uses Revenu Québec's instalment forms, such as CO-1027, Calculation of Instalments for Corporations. Check Revenu Québec's site for the current forms and due dates.

Does a new corporation record instalments in its first year?

Not required. A newly incorporated corporation need not pay federal instalments until it has started its second year of operation, so the first year has no required instalments; any payment actually made is still recorded as a prepayment. A corporation formed by amalgamation is treated as a continuation of its predecessors and generally takes their instalment bases, so it can owe instalments in its first year (CRA: T7B-CORP). Credit the whole year's tax to income tax payable and pay it by the balance-due day. Alberta tax follows Alberta's own first-year rule in the table above.

In the second year, instalments start unless the tax is at or under the threshold in the first table. Setting up the accounts in the first year is covered in books for a new CCPC.

Example

These examples are illustrative. All amounts are Canadian dollars, with no other T2 credits.

Four quarterly instalments, tax higher than paid

An Ontario CCPC with a December 31 year end pays four quarterly instalments of C$6,000, based on last year's tax. Each payment is debited to income tax instalments, C$24,000 in all. The T2 shows C$30,000 of tax.

• Year end: debit current income tax expense C$30,000; credit income tax instalments C$24,000; credit income tax payable C$6,000.
• The C$6,000 is due by the end of February, or the end of March if the corporation qualifies for the three-month day (a weekend or holiday moves it to the next business day). Paying it: debit income tax payable and credit the bank, C$6,000.

A big year was expected, tax lower than paid

A consulting corporation expected a big year and paid C$18,000 in instalments. Final tax is C$12,000.

• Year end: debit current income tax expense C$12,000; credit income tax instalments C$12,000.
• The remaining C$6,000 moves to income tax receivable: debit income tax receivable, credit income tax instalments. It stays there until the CRA refunds it after assessing the T2, or moves it to next year's instalments if line 894 says "2".

Alberta corporation, two tax authorities

An Alberta corporation had taxable income above the small business limit last year and expects the same this year, so it pays monthly to the CRA and to Alberta. Federal tax is C$150,000 and instalments are 12 payments of C$12,000, or C$144,000. Alberta tax is C$80,000 and instalments are 12 payments of C$6,500, or C$78,000.

• Year end, federal: debit current income tax expense C$150,000; credit federal instalments C$144,000; credit federal income tax payable C$6,000.
• Year end, Alberta: debit current income tax expense C$80,000; credit Alberta instalments C$78,000; credit Alberta income tax payable C$2,000.
• The books keep two instalments accounts and two payable accounts. Each ties to its own statement, and each balance is due by the end of the second month.

Different for you?

• Your books and the CRA account disagree, instalments were expensed or never recorded, or interest has started and a T2 is coming due: the tax accounts need to be cleaned and tied to the CRA before the return is prepared. That is bookkeeping help; the year-end close checklist shows the other accounts to settle first.
• Your first big profit year has arrived, or instalments were based on the wrong year: how the instalment base is chosen is in filing your corporate return; setting the year's tax right is corporate tax help, and getting the books ready is bookkeeping help.
• Several years of tax payments were never recorded, or the books are behind: start with catching up on overdue books, then get bookkeeping help.
• You pay both the CRA and a province, or you are in Quebec: two authorities mean two sets of accounts and two statements to tie. If the books are not set up that way, see bookkeeping help.
• The CRA has charged interest or a penalty, or reassessed a return: see penalties, interest and relief and recording CRA reassessments.
• You cannot pay the balance at once: see the payment arrangement guide.
• The payments are GST/HST, or your own personal instalments: use reconciling GST/HST payable or tax instalment reminders.