By the time summer arrives, nearly all Canadians have filed their income tax returns for the previous year, have received a Notice of Assessment from the tax authorities with respect to that return and have either spent their tax refund or, more grudgingly, paid any balance of tax owing.
It’s a surprise, therefore, when unexpected mail arrives from the Canada Revenue Agency (usually in mid- to late July), and the information in that mail will likely be both unfamiliar and unwelcome. Specifically, the enclosed Instalment Reminder form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2023 – and will helpfully identify the amounts which should be paid on each date.
No one particularly likes receiving unexpected mail from the tax authorities, and correspondence which suggests that the recipient should be making payments of income tax for 2023 to the CRA during the year (instead of when he or she files the return for 2023 in April 2024) is likely to be both perplexing and somewhat alarming. It’s fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an Instalment Reminder.
The reason that the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted by the employer to the CRA on the employee’s behalf. Such deductions and remittances accrue to the employee’s benefit, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own.
Where an individual is no longer an employee – for instance, he or she starts a business and becomes self-employed, or retires and begins to receive retirement income from various government and non-government sources – such deductions and remittances are no longer automatically made. However, Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Québec residents) in the current (2023) year and either of the two previous (2021 and 2022) years, that taxpayer may be subject to the requirement to pay income tax by instalments.
The reason that first Instalment Reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first Instalment Reminder for the current year
Taxpayers who receive that first Instalment Reminder in July may also be puzzled by the fact that it is a “Reminder” and not a “Requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder.
First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2024. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2023, he or she will of course receive a refund on filing.
Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2022 tax year (including any balance that was owed on filing). If a taxpayer’s income has not changed between 2022 and 2023 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2023 will be slightly less than it was in 2022, owing to the indexation of tax brackets and tax credit amounts.
Third, the taxpayer can estimate the amount of tax which he or she will actually owe for 2023 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2022 to 2023 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current-year taxes (federal and provincial tax brackets and rates) on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal.
All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment Reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the return for 2023 is filed next spring.
Once they have resigned themselves to the realities of the tax instalment system, the next question that most taxpayers have is how such payments can be made. The options open to taxpayers in that regard are helpfully outlined on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.