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Opening the Door to Home Office Deductions

Most people pay their tax by having tax withheld from their income during the year. However, if you receive income that has no tax withheld or doesn’t have enough tax withheld, you may have to pay tax by quarterly instalments.

This can happen if you receive self-employment, rental, or investment income,certain pension payments, or

The Cost of Breaking the Rules

If you don’t follow the rules, you could wind up paying significant interest and penalties.
   CRA charges interest when these three conditions are met:

  • You received an instalment reminder.
  • You were required to pay an instalment.
  • You chose not to pay, paid less than required or paid late.

   The CRA calculates the interest on each instalment you should have paid, each instalment you did pay and charges the difference between those amounts if it is more than $25.
   Instalment interest is compounded daily at a prescribed rate, which can change every three months and is based on short-term money market rates set by the Bank of Canada.
   CRA also imposes penalties if your payments are late or less than required, but only if your instalment interest charges exceed $1,000. The penalty is one-half of the amount by which the instalment interest is more than the higher of either $1,000, or one-quarter of the instalment interest that you would have had to pay if you hadn’t made instalment payments.

income from more than one job.

If you fall into one of those categories, you must pay four equal quarterly instalments during the year on the 15th of March, June, September and December. (Self-employed fishermen and farmers pay only one instalment, on Dec. 31.)

Those dates are firm unless the 15th falls on a Saturday, Sunday, or holiday recognized by the Canada Revenue Agency (CRA). In that case, the CRA considers your payment to be paid on time if it is received or is postmarked on the next business day. Otherwise, payments received or postmarked after the due dates are considered late and may result in interest and penalties (see right-hand box).

If for some reason you missed a deadline, you can cut or eliminate the interest charge by overpaying your next payment or paying it early.

The threshold for being required to make instalment payments is low: They are triggered if your total tax liability, minus any amount paid through withholding, is more than $3,000 this year and in either of the two preceding years. (The threshold drops to $1,800 if you lived in Quebec on Dec. 31 of the past two years, or you will live there on Dec. 31 of the current year.)

The CRA sends two reminders during the year to people who may have to remit tax, along with an amount the agency calculates. But keep in mind that the CRA can be wrong. If you know you won’t exceed the threshold, you aren’t required to make an instalment payment even if you receive a reminder.

The Income Tax Act allows three methods to calculate instalment payments:

1. The no-calculation option is the method the CRA uses. The agency bases the first two instalments for the year on your tax liability two years ago and then adjusts the final two instalments so the annual total equals what you paid last year. With this method, you could wind up overpaying if, for example, your income is declining. If that is your situation, you can opt for one of the other two methods.

2. The prior-year option allows you to pay an amount equal to last year’s tax (less amounts withheld at source) in four equal instalments.

3. The current-year option allows you to estimate your current year’s tax (less amounts paid through withholding at source) and pay it in four instalments.

Your accountant can help you plan ahead to help ensure you have the money needed to pay your instalments. When your personal income tax return is prepared, your accountant can recommend instalment amounts using whichever calculation method best suits your circumstances.