The Canada Revenue Agency (CRA) asks for tax installments when you establish a tendency to owe tax at the end of the year. But sometimes life gets in the way, income is low or expenses are high, and you don’t get around to paying the tax installments requested by CRA. So what happens if you don’t pay CRA installments?
Don’t panic if you don’t pay tax installments
The first thing to know is that you’re not in any serious trouble of you can’t, or don’t, pay your installments. The worst that will happen if you don’t pay installments is that you’ll end up paying some interest* on the unpaid amounts, back dated to when the installment was due.
Why CRA is asking for installments
As mentioned, the request for installment payments begins with a track record of owing tax. Generally, you tend to owe income tax when no tax is being withheld on some of your income. People with freelance income are often in this position. Since a freelancer’s clients aren’t withholding any tax on their payments, the freelancer ends up paying it at the end of the year.
More about income tax installments
A Track Record of Owing Tax
If your tax bill exceeds $3,000 for two out of three consecutive years, you get a request for installment payments. The requested installments for a given year add up to the tax you owed the year before. For example, if you had a $4,000 tax bill last year, your requested installments would typically be $1,000, spread out over four quarterly payments.
Sometimes not paying CRA installments is okay
Installment payment requirements and requested amounts are all based on the prior year’s income tax return. But the interest on unpaid installments is not based on the prior year, but on the current year during which the income is earned.
If You Know Your Income is Down
For example, say your tax bill last year was $4,000. But this year your income dropped and you expect your total tax bill to come to only $2,000. Since only tax bills in excess of $3,000 require tax by installments, you wouldn’t actually owe the installment payments. CRA finds that out when you file your return. In that case, they wouldn’t charge any interest on the ‘missed’ installments because in hindsight those installments are not required.
If You Know Your Income is Up
Here’s another interesting fact: say last year’s tax bill was $4,000 and you paid your four $1,000 installments as required. What happens if upon filing it turns out you actually owe even more tax? Once again, CRA would not charge you interest on the shortfall, because the additional installment wasn’t required; only the requested amount was.
In short: to avoid interest pay the requested installments or enough to cover your tax bill, whichever is less.
You Don’t Have To Go With CRA’s Requested Amounts
You know more about your income in the current year than CRA does (they won’t know until you file your return). So go ahead and set your own installment payments. Or don’t, if you don’t mind paying interest.
If on the other hand you hate interest, pay the installments or more – if you overpay, CRA will refund the excess.
*Note that CRA’s interest rate is fairly modest. Most years it’s around 5% per annum, but it can shift with general interest rate trends. Check here to see the current rate.
Thanks for the information. My client is a senior and they are requesting installments, which I find ridiculous, he should be able to keep his money and earn interest on it and then pay when the taxes are actually due.
You’re right. They should be able to do that, and they can. They can keep the instalments, earn interest, and just pay the tax when they file their taxes. The only thing is, CRA will also want interest for waiting…because they would also like to have the money and earn interest on it. So it’s kind of six of one, half dozen of the other, exempt with percentage points 🙂
how can the CRA take your money on an assumption that you will owe taxes at the end of next year on money that you have not earned. To me, it is like your employer taxing you before you get a pay cheque? You should have every right in this country to keep your money in your bank account without penalty from CRA. how can this be legal? Also, if I pay taxes every year I know that I am not getting enough taken taxes off my pay cheque, therefore, when the new year comes I have more taken off so that I do not get into this bind again. Great idea, but now I have to make installment payments on top of that, how can I stop the installment payments without paying a penalty.
The amount they request isn’t pulled out of thin air. It’s based on the taxpayer’s own track record (for two out of the last three years) of owing tax. If the instalments collected do end up exceeding the tax owed, the taxpayer gets the excess refunded back to them.
you did not answer my question though. The government is assuming that I am in the same tax bracket as the previous two of the three years. they do not know that I have lost my job or been in an accident and cannot work or had a heart attack from stress. How do I stop making payments without paying a penalty on my money that i am not going to owe anymore?? It just seems so insane that the CRA has that much power. It could be the difference between living on the street and staying in my own home and paying my bills just because i had money the last two years. Life is so unpredictable and yet the government continues like nothing changes.
I’m sorry to hear things have become so difficult for you. If this is the situation, you do NOT have to pay tax instalments.
There is no penalty for not paying your instalments. IF you owe tax at the end of the year, and if the tax owing exceeds $3,000, CRA will charge interest on the missed instalment payments, based on 1/4 of your tax owing spread out over four quarterly ‘missed’ instalments. Interest is not considered to be a penalty, but a result of an overdue payment (just as any other creditor would charge you, if your payments are overdue.
In your case you’re unlikely to owe any tax at the end of the year, so if you’ve made no instalment payments there’s no interest payable anyway.