Corporate tax instalments are advance payments that the Canada Revenue Agency (CRA) requires corporations to remit in order to cover the taxes for the current fiscal year. The required amount of tax instalment, and the due date for each payment will vary depending on the amount of taxes the company owes and the status of the corporation.
Why do you need to pay tax by instalment?
A corporation is required to pay tax by instalment if the company’s taxes payable for the current or previous year exceeds the threshold of $3,000. The exception to the rule applies to a newly incorporated business even if the taxes payable during the first year of operation is greater than $3,000.
What amount do you need to remit?
There are three options to calculate the required instalments that need to be remitted. The most common option is to pay current year instalment based on the taxes payable in the previous year. On the other hand, you can choose to remit instalment based on the estimated tax liability of the current year. This option is suitable if you anticipate that the current year’s taxes payable will be less than the amount paid previous year. However, note that if the actual taxes payable exceeds the estimated tax liability for the current year, you will be subject to interest charges (and possibly penalty). The last option is a complex calculation which takes into account of the previous year’s taxes payable and the year before the previous year.
When is the due date?
If the corporation’s taxes payable for the current or previous year exceeds $3,000, instalment must be remitted on a monthly or quarterly basis. You can only remit instalment on a quarterly basis if the status of the corporation meets the following criteria:
- Canadian Controlled Private Corporation
- Perfect compliance history during the last 12 months including all remittance for GST/HST and payroll deductions
- Claimed a Small Business Deduction (SBD) in the current year or previous year
Most small businesses would qualify to remit instalments on a quarterly basis. However, if your company does not meet the above conditions, then you are required to remit on a monthly basis.
For quarterly remitter, the first payment is due at the end of 3 months following year-end. For example, if your company has a December 31 year-end, the tax instalments are due on March 31, June 30, September 30, and December 31 of the following year.
For monthly remitter, the first payment is due at the end of 1 month following year-end. Again if your company has a December 31 year-end, the first instalment is due on January 31, and then at the end of every month thereafter until December 31 of the following year.
What if you don’t pay tax instalment?
Late payment or failure to remit is subject to instalment interest of 5% compounded daily. If instalment interest exceeds $1,000, the CRA may levy an instalment penalty. This is calculated by subtracting from the instalment interest the greater of $1,000 and 25% of the instalment interest calculated as if no instalment payment had been made for the year. The difference is divided by one-half to arrive at the amount of the penalty.
For example, if your corporation has a $30,000 taxes payable in a previous year and you did not remit instalments in the current year, the instalment interest is calculated as $30,000 x 5% = $1,500. Since the interest is greater than $1,000, the company is also subject to instalment penalty. $1,500 – (greater of $1,000 or 25% of $1,500 = $375) = $500. One-half of the difference is $250. By not remitting any instalment, your corporation could potentially be subject to an additional $1,500 + $250 = $1,750 of interest and penalties.
Missing tax instalment due date is one of the most common mistakes business owners make. You should work closely with your accountant to ensure that instalment payments are remitted on time.