Sending money to Canada Revenue Agency before you know exactly how much your corporation will owe in taxes for the year can feel unnecessary. However, the consequences can be expensive if your corporation doesn’t make tax instalments when required. Knowing your corporation’s obligations could save you hundreds or even thousands of dollars in interest and penalties.
Does my corporation need to pay tax instalments?
Your corporation needs to pay instalments in 2023 if:
- Your corporation’s total federal tax before certain credits for 2023 will be $3,000 or more, and it was also $3,000 or more in 2022 OR
- Your corporation’s total provincial tax for 2023 will be $3,000 or more, and it was also $3,000 or more in 2022 ($2,000 if your corporation is resident in Alberta, but only if your corporation did not claim the Alberta Small Business Deduction and/or had taxable income over $500,000)
If your 2022 fiscal year was less than 365 days, the taxes owing for that year are adjusted to a 12-month equivalent for the purpose of determining if the above thresholds have been met.
Why does my corporation need to pay tax instalments?
Canada Revenue Agency wants to collect income taxes as quickly as possible. The instalment payment system accelerates payments so that they are received throughout the year rather than as a lump sum at the end.
When are the corporate tax instalment payment due dates?
Generally, instalment payments are due on the last day of each month.
If your corporation meets certain criteria, it might qualify to make payments quarterly instead of monthly. However, checking eligibility is rather onerous. To pay quarterly instead of monthly, your corporation must have the following:
- Claimed the small business deduction in the current year or last year
- A “perfect compliance history” for the previous 12 months of GST/HST and income tax payments
- A total taxable income of less than $500,000 and taxable capital of $10 million when you add your corporation’s numbers to those of all the other corporations associated with it
Given that verifying all these conditions may not be a simple task in many cases, it might be easier to pay monthly. Furthermore, if you think you are eligible to pay quarterly and CRA disagrees with you, they will charge you interest.
How much does my corporation need to pay?
There are 3 options available for calculating your corporate income tax instalments. Note that if your previous or second preceding fiscal year was less than 365 days, the taxes owing for that year are adjusted to a 12-month equivalent for calculation purposes under all options.
Option 1 – Prior-year calculation
Each instalment payment for this year equals last year’s taxes divided by 12.
Option 2 – Mixed option
This option is a mix of the first and second preceding tax years.
The first two instalment payments for the current fiscal year = The second preceding tax year’s taxes payable divided by 12. Let’s say your 2021 taxes came to $12,000, and your 2022 taxes total $18,000. Your first two instalment payments for 2023 would then be your 2021 taxes of $12,000 / 12 = $1,000 for each payment.
The remaining ten instalment payments for the current fiscal year = The prior year’s taxes payable less the first two payments made and divide the result by 10. Continuing our example above, the last ten payments would be ($18,000 2022 taxes – $2,000 payments already made) / 10 = $1,600 per payment. At the end of the fiscal year, the total instalment payments would be $18,000 (1,000 x 2 + 1,600 x 10).
This option may seem more complicated than the first one, but it allows time to get numbers together. It would be unusual to know exactly what your 2022 tax balance is within a month of the end of the fiscal year, which is when your first payment towards your 2023 corporate taxes is due. This option allows you to use 2021 numbers for the first two payments and then make up the difference with the remaining payments when the 2022 numbers are known.
Option 3 – Current year option
If your corporation’s income has declined significantly from prior years, this option might work better than the others. To calculate your monthly payments with this option, estimate this year’s taxes payable and divide by 12.
If you use this option and your estimates are too low, CRA will charge you interest on the difference between what you paid and the amount calculated under the other two options above (whichever is lower).
What happens if I do not pay corporate tax instalments?
If you did not pay instalments when required, you would be charged interest and possibly a penalty. See calculation details below.
What happens if I have a balance of corporate tax payable?
If your corporation has a tax balance owing after paying any required instalments, that balance owing is generally due within 2 months of the corporation’s fiscal yearend. If your corporation claimed the Small Business Deduction and its taxable income is low enough, the due date is extended to 3 months after the end of the fiscal year.
You should not be charged interest on your corporate taxes if:
- You use Option 1 or Option 2 to calculate your instalment payments as described above AND
- All calculated instalments are paid before their due dates AND
- Any remaining balance owing is paid within 2 months of the corporation’s fiscal yearend (3 months if your corporation claimed the Small Business Deduction and its taxable income is low enough)
If you use Option 3 (Current-year option) to calculate your instalments and have a balance owing, you will be charged interest and possibly penalties.
How are corporate tax instalment interest and penalties calculated?
CRA will first determine the instalment payments that should have been made under all 3 options above. They will charge interest and penalties using the calculation that results in the lowest payment and, therefore, the lowest interest/penalty.
Interest is calculated based on CRA’s prescribed rate, which changes every 3 months. The current prescribed rate (for the last quarter of 2022) is 7% for overdue instalments. The rates for the first 3 quarters of this year were 5%, 5%, and 6%, respectively. So, if you missed your March 31, 2022, instalment payment entirely, you would be charged 5% interest from March 31-June 30, 6% interest from July-October, 7% from October-December and whatever the 2023 rates are for January onwards until full payment is made.
If you paid less than any required instalment, interest would be charged on the difference. For example, if the lowest instalment payment calculated under options 1, 2, and 3 above was $2,500 for March 31, 2022, and you paid $1,500 on that date, you would be charged interest on $1,000.
Depending on changes to the prescribed interest rate, you can reduce or possibly eliminate this interest charge by making future instalment payments early. So, if you realize on June 10th that you haven’t made your May 31 instalment payment, you could immediately pay May 31 and June 30 together to reduce or offset the interest that you would otherwise be charged on your May payment.
If you realize in January that you should have made instalments for the previous year, you can make a lump sum payment to reduce future interest charges.
If your instalment interest is $1,000 or more, then CRA may also add a penalty. This penalty is calculated as 50% of [the interest payable on instalment shortfalls less $1,000 or 25% of the interest you would have had to pay if you made no instalment payments during the year, whichever is greater].
For example, if you paid no instalments at all for the year and the interest charges amount to $1,500, the instalment penalty would be calculated as follows:
Penalty = 50% of Interest charges – (greater than 1,000 or 25% of instalment interest calculated if no payments had been made at all)
= 50% [1,500 – greater than 1,000 or 1,500 x 25%]
= 50% [1,500-1,000]
Contact McCay Duff LLP in Ottawa for Comprehensive Tax Solutions and Support
At McCay Duff LLP, our trusted team of Chartered Professional Accountants provides high-quality tax and business advisory services to Ottawa and surrounding area businesses. Our expert tax advice, planning and preparation help corporations maximize profitability and minimize tax obligations while remaining compliant. If you need assistance determining your corporate income tax instalment payment amounts, contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.