How Tax Instalments Work in Canada: Who Pays and When
Most employed Canadians never think about tax instalments because their employer deducts tax at source. But if you’re self-employed, earn investment income, or have income from multiple sources, CRA may require you to pay tax in quarterly instalments.
Who Has to Pay Instalments?
CRA requires quarterly instalments if your net tax owing exceeds $3,000 in the current year AND in either of the two prior years. For Quebec residents, the threshold is $1,800.
Common situations:
- Self-employed individuals
- Freelancers and gig workers
- Landlords with rental income
- Investors with significant dividend or interest income
- Retirees receiving income without adequate tax withholding
When Are Instalments Due?
| Quarter | Due Date |
|---|---|
| Q1 | March 15 |
| Q2 | June 15 |
| Q3 | September 15 |
| Q4 | December 15 |
Three Methods for Calculating
CRA offers three instalment calculation methods. You can choose whichever results in the lowest payment (as long as you don’t underpay):
1. No-calculation method
Pay the amounts CRA tells you. They send instalment reminders based on your prior returns. Simplest option.
2. Prior-year method
Base your instalments on last year’s tax owing divided by 4. Good if your income is stable.
3. Current-year method
Estimate your current year’s tax and pay accordingly. Best if your income dropped significantly from last year (lower payments).
What Happens If You Don’t Pay?
CRA charges instalment interest on late or insufficient payments. The interest rate is the CRA prescribed rate plus 4%. The interest compounds daily and can add up quickly.
There’s also a potential instalment penalty if your instalment interest exceeds $1,000 and is more than 25% of what you would have owed using the no-calculation method.
Tips to Manage Instalments
- Set up automatic payments. CRA’s My Account lets you schedule instalment payments. Automate it so you don’t miss due dates.
- Adjust mid-year if income changes. If business drops off, recalculate using the current-year method.
- Keep a dedicated tax savings account. Set aside 25% to 30% of self-employment income as you earn it.
- Coordinate with RRSP contributions. A large RRSP contribution can reduce your instalment requirement for the following year.
- Don’t ignore CRA reminders. They’re calculated for you. Pay them or calculate your own and document why.
Need help managing your tax instalments? Book a free consultation with FinGems.