My personal tax filing has been simple. Historically, my total income included a T4 slip issued by Welch LLP and a nominal amount of investment income. In 2021, I had to dispose of a significant portion of my investment portfolio to fund a home renovation project. My investments had performed well, which resulted in realized capital gains. As a result, the net tax owing on my 2021 personal tax return was over $3,000. As a tax practitioner, I immediately asked myself: Am I required to pay tax instalments for 2022?
What are tax instalments?
Tax instalments are payments you make throughout the year to cover the taxes you normally pay in one lump sum on your annual tax return of the following year.
Who is required to pay individual tax instalments?
There are two factors to consider:
Factor #1: Province / Territory of residence on December 31
The province or territory where you live on December 31 sets the threshold for your net tax owing for purposes of tax instalment requirements:
- Quebec residents: net tax owing > $1,800; or
- Residents in all other provinces / territories: net tax owning >$3,000.
I am an Ontario resident. Hence, I will use the $3,000 benchmark to determine my tax instalment obligation.
Factor #2: Net tax owing
Both of the following conditions must be met in order to trigger my 2022 income tax instalments requirement:
Condition 1: Net tax owing exceeded $3,000 in either of the 2021 or 2020 taxation years. Since my net tax exceeded $3,000 in 2021, Condition 1 is met, regardless of the fact that My net tax was under $3,000 in 2020; and
Condition 2: Net tax owing in 2022 also exceeds $3,000.
Does CRA Remind me to Remit Tax Instalments?
CRA sends out instalment reminders for individuals twice a year:
- in February, for the March and June payments; and
- in August, for the September and December payments.
I expect to receive an instalment reminder in August, due to the fact that my 2021 net tax owing was more than $3,000. I will have to make an educated guess as to whether my 2022 net tax owing will exceed $3,000. If it will be over $3,000, failure to remit tax instalments for 2022 will result in interest charges. If net tax owing is under $3,000, I don’t have to pay 2022 instalments. Alternatively, if I expect my 2022 net tax owing to be lower than in 2021, but still expect it to exceed $3,000, instalments may be remitted based on the estimated tax for the year – care should be taken however, since underestimating/under-remitting instalments in this case may result in interest charges.
What if I do not Respond to the Tax Instalments Reminder(s)?
If you have received an instalment reminder and are required to pay instalments, but you do not pay sufficient amounts on time, CRA may assess instalment interest and penalty charges.
CRA will charge instalment interest on all late or insufficient instalment payments. Instalment interest is compounded daily at the prescribed interest rate (currently 5%). This rate is determined in each quarter and may thus fluctuate.
If your instalment interest charges for a year exceed $1,000, you may also have to pay a penalty.
GST/HST Tax Instalments for Sole Proprietors
If you have a business that is registered for GST/HST and you file annual GST/HST returns (as opposed to monthly or quarterly), you may have to make quarterly instalment payments in the current year if your previous year’s net GST/HST tax owing is $3,000 or more. The “My Business Account” portal has an instalment payment calculator in the GST/HST section to help with this calculation.
If you have any questions or if you would like assistance in preparing these applications, please contact your Welch LLP advisor.