Corporate tax instalments are advance payments the Canada Revenue Agency (CRA) requires businesses to remit to cover the current year taxes. The required amount of tax instalment, and the due date for each payment will vary depending on the taxes owed and the status of the corporation.
Does Your Business Need to Pay Tax By Instalment?
A business is required to pay tax by instalment if the tax payable for the current or previous year exceeds the threshold of $3,000. An exception applies to a newly incorporated business even if the projected tax liability for the first year of operation is greater than $3,000.
How Much Do You Need to Remit?
There are three options to calculate the required tax instalment. The most common option is to pay current year instalment based on the actual tax liability in the previous year. Alternatively, you can remit instalment based on the estimated tax liability for the current year. This option is ideal if you anticipate the current year’s taxes payable to be less than the actual taxes paid in the previous year. However, if the actual tax liability for the current year exceeds the estimated tax liability, your business will be subject to instalment interest (and possibly penalty). The last option takes into account the last two years’ of actual taxes payable.
When Are Instalments Due?
Corporate tax instalments are generally due on a monthly basis by the last day of each month. Your business may qualify to remit on a quarterly basis if the status of the corporation meets all of the following criteria:
- Canadian Controlled Private Corporation (CCPC)
- Perfect compliance history during the last 12 months including all remittance for GST/HST and payroll deductions
- Claimed a Small Business Deduction (SBD) in the current year or previous year
Most small businesses would qualify to remit instalments on a quarterly basis. However, if your company does not meet any of the above conditions, you are required to remit on a monthly basis.
For quarterly remitter, the first payment is due at the end of 3 months following year-end. If your company has a December 31 year-end, tax instalments are due on March 31, June 30, September 30, and December 31 of the following year.
For monthly remitter, the first payment is due at the end of 1 month following year-end. If your company has a December 31 year-end, the first instalment is due on January 31, and at the end of every month thereafter.
What If You Don’t Remit Tax Instalment?
Late payment or failure to remit is subject to instalment interest at 6% compounded daily. If instalment interest exceeds $1,000, the CRA may levy an instalment penalty. It is calculated by subtracting the instalment interest by the greater of $1,000 and 25% of the instalment interest calculated as if no instalment payment had been made for the year. The difference is divided by one-half to arrive at the penalty amount.
For example, if your corporation has a $30,000 taxes payable in the previous year and you did not remit instalments in the current year, the instalment interest is calculated as $30,000 x 6% = $1,800. Since the interest is greater than $1,000, the company is also subject to instalment penalty. $1,800 – (greater of $1,000 or 25% of $1,800 = $450) = $800. One-half of the difference is $400. By not remitting instalment, your corporation could potentially be subject to an additional $1,800 + $400 = $2,200 of interest and penalties.
Missing corporate tax instalment due date is one of the most overlooked mistakes. Work closely with your accountant to ensure instalment payments are remitted on time.