When you start your own business, you realize how great it was to have taxes magically lifted away from your paycheque. Now, rather than doing your taxes once a year, you’ll have to make tax instalments throughout the year. We know it sounds like a drag. But we will walk you through some ways to make it easy. September is the perfect time of year to get caught up on your instalments if you haven't made any yet.
Here’s a rundown on tax instalments: what types there are, how to figure out how much you owe and when you’ll need to make those payments.
Personal Tax Instalments
If your net tax owing is more than $3,000 on your personal tax return, you need to make quarterly instalments. Your tax instalments will cover any amounts owing for the upcoming tax year.
Your tax instalments are based on your prior year's tax amount owing. If you really want to get specific on the amounts, you can use the CRA’s calculation sheet to determine how much you will owe. If you you expect your 2019 tax owing will be similar to 2018, then just use your 2018 tax owing, and divide it into 4 equal payments. Adjust up or down if you expect your current year amount owing to be higher or lower than your prior year.
These instalments are due on March 15, June 15, September 15 and December 15 (or the next business day if the 15th falls on a weekend or holiday). If you have missed the first couple payments, you can add them to your third payment.
Corporate Tax Instalments
If your corporation owed more than $3,000 last year, you will be required to make quarterly instalments this year. Take the amount you owed last year, and divide it by 4, and pay that amount each quarter. The CRA may require you to make monthly instalments if you have a less-than-stellar compliance history.
Corporate tax instalments are due at the end of each month or quarterly.
If your business owed more than (you guessed it!) $3,000 in GST, you will need to make instalments. Take the amount you owed last year and divide into quarterly payments (e.g. If you owed $8,000 in 2018, pay $2,000 quarterly during 2019)
If you think you’ll owe less GST this year, you can calculate your GST instalments based on your best guess for the current year. However, if you underpay, you will owe interest on the underpaid amount.
Your instalments are due within one month of the end of each quarter. If you have a June 30 year end, your first quarter would be July 1 to Sept 30, and your GST instalment would be due Oct 31.
Payroll Remittance Instalments
Payroll Remittances include money you withhold from each employee for personal income taxes, CPP and EI. These payments are due on the 15th of the month following the month the employee was paid. For example, the remittance payment for June payroll needs to be paid by July 15.
If your company has no employees, the owners have some flexibility. Generally, the owners will still need to do monthly payroll remittances if they choose to do wages rather than dividends for their own compensation. Owners are usually exempt from EI, and can even choose to get paid once a year, as an annual bonus, which allows them to just make one single payroll remittance 15 days after their year end.
If you happen to miss the 15th of the month payment deadline, you will be hit with a 10% penalty (5% for the first offense). In Alberta, make sure to make the payment before 10pm, which is midnight out East (where the government is). And they will ding you with that 10% penalty.
What if I don’t make the instalments?
As noted in the above sections, instalments are based on your prior year - so if this year looks very similar to last year, then you can expect to owe a similar amount in GST and Corporate Tax.
Here’s how they ding you if you don't make your instalments:
- If you owe exactly the same this year as you did last year: if you don’t make your instalments, you will be charged interest from the date the instalment was due, to the date the amount is paid.
- You don’t owe as much this year: You are only charged interest on instalments if owe money and do not make the payment. So, say you owed $8,000 last year and your instalments were supposed to be $2,000/quarter, but this year you only owe $6,000: if you make no instalments, you would be charged interest on your first 3 (unpaid) instalments, but not your fourth. If you end up owing less than $3,000, and do not make any instalments, you will not be charged any interest.
- You owe more than last year: If you didn’t owe more than $3,000 last year, you don’t need to make instalments. So even if you end up owing $30,000, you will not be charged interest. If you had instalments to make this year and you know you’ll owe more than those instalments, you only have to pay the calculated amounts, which were based on last year. The remainder still needs to be paid at the payment deadline, so make sure you save for this. You can also make additional instalments if you want.
When does interest start being charged?
Each instalment payment has its own interest charge. Your first missed instalment will start accruing interest the day after it was due, and continue accruing until it is paid. The same would occur for your second, third, and fourth payment.
If your year-end is June 30, 2019, and your instalments were due Oct 31, 2018, Jan 31, 2019, April 30, 2019 and July 31, 2019, and you just pay all your tax owing on Sept 20, 2019, your interest charged would be as follows:
Instalment 1: Nov 1, 2018 to Sept 20, 2019
Instalment 2: Feb 1, 2019 to Sept 20, 2019
Instalment 3: May 1, 2019 to Sept 20, 2019
Instalment 4: Aug 1, 2019 to Sept 20, 2019
How much interest is charged?
Interest is compounded daily at 6%.
Whew! There’s a lot to keep track of when it comes to tax instalments. As your small business accountants, we can do all of this for you: make sure you never miss a payment, under pay or owe interest. Make an appointment with us here.