Navigating personal income tax instalments in Canada can be complex, especially for healthcare professionals with varying sources of income. This blog post will guide you through the key aspects of personal income tax instalments, helping you stay compliant and avoid unnecessary penalties.
- Instalment Requirements: If your net tax owing exceeds $3,000 ($1,800 in Quebec) in the current year and either of the two preceding years, you must pay tax instalments.
- Instalment Calculation Methods: Instalments are based on the lesser of the current year’s estimated tax, the previous year’s tax, or the average tax of the last two years.
- Payment Methods and Consequences: Pay instalments via online banking, CRA’s My Payment service, pre-authorized debit, Interac e-Transfer, or cheque. Underpaying can lead to interest and penalties.
When Instalments are Triggered
Personal income tax instalments are required when your net tax owing exceeds $3,000 ($1,800 for Quebec residents) in the current year and either of the two preceding years. This means that if you owed more than this amount after deducting taxes withheld at source and refundable credits, you might need to pay tax instalments.
How Instalments are Calculated
Instalments are calculated based on the lesser of:
- The tax owing from the current year (estimated).
- The tax owing from the previous year.
- The average tax owing from the two previous years.
The Canada Revenue Agency (CRA) sends instalment reminders with the suggested payment amounts, but you can calculate your own instalments if you expect your income to differ significantly.
Requirement to Pay the Amount Set Out in the Instalment Request
While the CRA provides suggested instalment amounts, you are not strictly required to pay the amounts indicated. Instead, you must ensure that sufficient instalments are paid by the end of the tax year to cover your tax liability.
Consequences of Failing to Pay Instalments
Failing to pay required instalments or underpaying can result in interest charges and penalties. The interest is compounded daily and starts accumulating from the date the instalment was due. Penalties may apply if the instalment interest exceeds $1,000.
How Instalments are Paid
Instalments can be paid in several ways:
- Online banking
- CRA’s My Payment service
- Pre-authorized debit
- Interac e-Transfer
- Cheque or money order
Option to Pay a Lesser Amount
You can opt to pay a lesser amount than what the CRA suggests if you reasonably believe your tax liability for the year will be lower. However, if you underpay, you may be subject to interest and penalties.
Higher Earnings in the Current Year
If you earn more in the current year than in previous years, there is no obligation to pay a higher amount in instalments. However, it is crucial to ensure that enough money is set aside to cover the excess tax liability by April 30th of the following year. This helps avoid potential interest charges and penalties for underpayment.
Calculation of Instalments by Our Office
Our office typically calculates instalments based on the average of the tax owing from the last two years. This method provides a balanced estimate, considering potential fluctuations in income.
Sources of Income Without Withholding Tax
Certain types of income do not have tax withheld at source, making it necessary to manage tax liabilities through instalments. Examples include:
- Scholarships and Grants: Generally not taxed at source, requiring recipients to manage their tax obligations.
- Pregnancy and Parental Leave Benefits (PPLPB): Often insufficiently taxed at source.
- Self-Employment Income: Includes locums, moonlighting, HOCC (Hospital On-Call Coverage) fees, and associate income.
- Rental Income: Landlords must account for and pay taxes on their rental income.
- Investment Income: Dividends, interest, and capital gains often lack sufficient tax withholding.
Understanding and managing personal income tax instalments is crucial to avoid unexpected tax liabilities and penalties. Tucker Professional Corporation is an accounting and tax practice focused on serving Canadian healthcare professionals. Jonathan Tucker, CPA, CA, LPA, leads the practice, bringing extensive experience and dedication to helping clients manage their financial and tax obligations effectively.
For personalized advice and to avoid these pitfalls, contact Jonathan Tucker, CPA, CA, LPA, at [email protected] or by phone at (905) 601-5659, x101.
Jonathan Tucker, CPA, CA, LPA, focuses his time and firm resources on providing tax and business advisory services to healthcare professionals across Canada. Reach out if you have more questions or need further assistance!
