CRA Instalment Reminder: Pay, Reduce or Catch Up

Is a CRA instalment reminder a bill?

The reminder is a suggested payment schedule, not a bill for an assessed debt. The CRA sends it because your past returns suggest that you may need to prepay this year's tax; your current-year position decides whether instalments are required (CRA: who has to pay).

When are CRA instalments mandatory for you?

You generally need personal instalments only if your net tax owing exceeds the applicable threshold both this year and in either of the two previous years. A large amount owing last April alone does not settle this year's test; income from dividends, self-employment or rent matters only through the tax left after withholding and credits (CRA: who has to pay).

Net tax owing is tax payable after withholding and applicable credits, before subtracting instalments already paid. Use previous assessments and the CRA calculation chart. CPP and voluntary EI do not count toward the threshold but can increase instalments. If self-employment from farming or fishing is your main source of income, net tax owing must exceed the threshold in both previous years; one payment is due December 31 (Income Tax Act, section 156.1; CRA: due dates).

Which amount should you pay: the reminder, last year's tax or your estimate?

You may use any of the CRA's three methods (CRA: calculation options; Income Tax Act, section 156).

The prior-year method fits when this year resembles last year; a lower current-year estimate can reduce payments but adds interest risk. For most people, due dates are March 15, June 15, September 15 and December 15. If a date falls on a weekend or CRA-recognized holiday, payment received the next business day is on time (CRA: due dates). If your August reminder shows only September and December, the prior-year or current-year chart puts three quarters of the annual total due in September and the rest in December; the no-calculation method uses the printed amounts (CRA: who has to pay).

Can you pay less if your income dropped?

Yes, if your net tax owing supports a lower current-year amount. At or below the threshold, no instalments are required even if a reminder arrived; any remaining tax is generally due by April 30 of the following year. Above it, use the current-year method and keep your calculation (CRA: who has to pay; CRA: instalments overview).

A dividend cut in half does not necessarily cut tax in half. Re-estimate income, deductions, credits and withholding. An underestimate can bring interest (CRA: interest and penalties).

You missed September 15: can December 15 catch you up?

December can clear the missed instalment, but waiting can leave interest for the late period. Check this year's threshold test, calculate any September shortfall, and pay it now. Paying the next instalment early or overpaying it can reduce or eliminate interest within the same tax year; the credit is not refundable (CRA: interest and penalties).

The CRA uses the method producing the least instalment interest. Pay as a current-year personal income tax instalment and keep confirmation. Net interest of $25 or less is not charged; a penalty is possible only if instalment interest exceeds $1,000. See penalties, interest and relief for calculations and relief.

What if you already paid or other tax is being withheld?

Withholding reduces net tax owing for the threshold test. Instalments already credited to this tax year reduce the amount still to pay, not net tax owing. The CRA says you may reduce or stop payments after an August-only reminder if payments already cover estimated net tax owing, or if net tax owing is at or below the threshold (CRA: who has to pay).

Check the tax year and account in CRA My Account. A payment against last year's balance or your corporation's account is not this year's personal instalment unless the CRA transfers it; keep proof (CRA: how to pay).

How can you avoid needing instalments next year?

Plan for enough tax to be withheld, or a low enough net tax owing, that the next year's estimate stays at or below the threshold. The CRA specifically allows increased withholding on employment or pension income; it says income tax cannot be withheld from self-employment, investment or rental income through those income sources (CRA: calculation options).

A reminder may still arrive based on old returns. Apply the two-year lookback again; one year below the threshold does not erase an older year still within it. Whether salary instead of dividends changes total tax and contributions belongs in salary or dividends.

How are Quebec instalments different?

Quebec residents may owe two separate instalments. The CRA tests net tax owing against $1,800; Revenu Québec tests provincial net income tax payable against $1,800. Each looks at this year and either previous year (both previous years for farmers and fishers). Calculate and pay each account separately (CRA: who has to pay; Revenu Québec: instalment payments).

Revenu Québec offers notice, previous-year and current-year methods. Most residents pay March 15, June 15, September 15 and December 15; farmers and fishers pay once by December 31. Late or short payments draw daily compounded interest. If less than 75% of a required payment is made, Revenu Québec adds daily compounded interest at 10% a year on the unpaid part (Revenu Québec: calculating payments; making payments).

Example

These amounts are illustrative and in Canadian dollars. Assume no CPP or voluntary EI amount is added.

A B.C. owner gets an August-only reminder

The owner's C$9,000 balance last April also equalled last year's net tax owing and instalment base; the year before, net tax owing was zero. The reminder asks for C$4,500 on each of September 15 and December 15. This year's dividend is half as large; after recalculating, the owner estimates C$4,500 of net tax owing.

Here the prior-year method collects the same annual amount as the reminder, but sooner.

September was missed

Suppose the required September payment was C$4,000 and nothing was paid. Paying C$4,000 now shortens the late period. Paying it on December 15 leaves about three months of interest; overpaying the next instalment or paying it early can reduce or eliminate that charge.

Salary covers next year's tax

An owner expects C$6,000 of tax from dividends next year but switches part of the pay to salary with tax withheld. If the resulting net tax owing is C$2,000 and the owner lives outside Quebec, next year's instalment threshold is not crossed. The owner still checks the final tax estimate and any reminder.

Different for you?

• You cannot pay the balance on your return: see owing tax after dividends and gather your payment history and estimated year-end balance.
• Your corporation has its own tax bill: corporate instalments follow different rules; see filing your corporate return.
• Self-employment income is driving the gap: see how self-employed income is taxed.
• You need to estimate dividend tax: see tax on dividends from your corporation.
• Two provinces, Quebec payments, or an uncertain estimate affect the choice: bring both previous assessments, the reminder, payment dates, withholding slips, and your current-year income estimate to individual tax.