Do you need to make income tax instalment payments?

Twice a year, Canada Revenue Agency sends out instalment reminder letters to those taxpayers who are required to make payments. The February letter outlines the required payments on, or before, March 15 and June 15. The August letter outlines the required payments on, or before, Sept. 15 and Dec. 15.

 

The February 2019 notice will be based primarily on your 2017 tax return. If you owed more than $3,000 in taxes in 2017, then you will likely be asked by CRA to make instalments on March 15 and June 15t through the February 2019 notice. CRA would not know what your income was for 2018 by the time the February notice are sent. Nor will it know what your income will be for the current year.

The August 2019 notice will enable CRA to adjust the numbers based on your actual 2018 net tax owing. If your net tax owing was less than $3,000 in 2018, you will likely not be asked to make instalment payments on Sept. 15 and Dec. 15.

It is important to note that you have to pay your income tax by instalments for 2019 if both of the following apply:

• Your net tax owing for 2019 will be above $3,000 in British Columbia

• Your net tax owing in either 2018 or 2017 was above $3,000 in British Columbia

The instalment payments are to cover tax that you would otherwise have to pay in a lump sum on April 30 of the following year. Instalments are designed so that taxes are paid throughout the calendar year while you are earning the taxable income.

Infrequent income spike

We often see individuals who have sold a rental property, businesses or investments, which generates a significant capital gain. This is a one-time spike in income, which is not going to necessarily repeat. One of the flaws in the instalment notice is that it is simply an automated process based on the $3,000 thresholds notice above. The year after you have a spike in income, many people are asked to make instalment payments.

You do not have to pay your income tax by instalments for 2019 if you know your net tax owing for 2019 will be $3,000 or less in British Columbia, even if you received an instalment reminder in 2019. It is always best to check with your accountant before skipping instalment payments.

Common areas triggering instalment notices

If you are an employee, and have no other sources of income, you likely do not have to worry about making instalment payments. Your employers has an obligation to withhold appropriate income tax from your earned income. Individuals who work more than one job may also have an insufficient amount of tax withheld, as each employer has based the withholding tax on payroll tables and income from the one job. If you do have two jobs and when both incomes are combined, you are in a higher tax bracket than the payroll table. This will normally result in taxes being owed at the end of the year. You can always request that your employer withholds a higher level of tax on a voluntary basis.

There are situations where taxpayers have income from activities other than employment. In many of these cases, tax is not withheld at source, meaning that you may have to pay tax at the end of the year. This often impacts individuals who have multiple forms of income.

Examples of situations that can result in instalment payments include self-employment income, RRIF payments, Old Age Security payments, Canada Pension Plan benefits, rental income, certain pension income, capital gains and other investment income.

Speaking with a wealth adviser and accountant about instalment payments can often result in some helpful tips on ways to reduce your net tax owing, or even eliminate the need to make the CRA scheduled instalment payments. The easiest way to reduce your net tax owing is by voluntarily withholding tax on certain forms of income on an automated basis. You can withhold tax on your RRIF income by talking to your wealth adviser. Another common strategy is to complete the “Request for Voluntary Federal Income Tax Deduction” form to have tax withheld on Canada Pension Plan and Old Age Security.

Interest and penalties

For some people, making the instalment payments is not a big deal. They simply make the four remittances a year on time. In order to make these instalment payments on time, you have to be organized, have the funds previously set aside and remit them to CRA on or before the required dates.

If taxpayers do not make the required instalments, they may have to pay interest and penalty charges. CRA charges instalment interest on all late or insufficient instalment payments. Instalment interest is charged at the posted prescribed rate (changes every three months) and compounds daily. CRA may also charge penalties if the taxpayer makes payments that are late or less than the requested amounts. Penalties normally apply when your interest charges are more than $1,000.

The worst part about these types of interest and penalty charges are that taxpayers cannot deduct these on their tax return. This is an absolute cost that is permanently lost.

Notice of assessments

One of the services we provide to clients is a review of their tax returns. Fifteen years ago, we used to ask clients to bring in tax returns and notices of assessment, but now we have been able to proactively get this information online, directly from CRA. One of the first documents that we read every year is a client’s notice of assessment. With respect to instalments, we look for three things:

1. Do they have a requirement to make instalment payments?

2. Were any interest or penalties assessed in previous years for not paying required instalments?

3. How can we help the client automate the process?

In some cases, withholding tax on RRIF, CPP and OAS is not enough. Some clients do not wish to voluntarily send CRA any money ahead of time. One of the services we provide for clients with a non-registered account is the ability for us to pay their required instalment amounts directly from their investment account. We have access to the numbers on the CRA website and if a client has provided consent, we can take care of those payments on their behalf. This is particularly valuable for our clients who are busy, travelling or aging.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with the Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonsit. Call 250-389-2138. greenardgroup.com