Usually we get a flurry of these questions after the instalment letters go out from the CRA containing remittance slips and instalment schedules. (Although our clients also get an instalment schedule in their tax package.) The answers below apply to both personal taxes and corporate taxes. Provinces are similar or administered by the federal government.
Legally, no, you do not have to pay your instalments.
Ultimately, if you do have taxes owing at the end of the year, regardless if you pay them on time, you will STILL be subject to interest charges on the instalments you did not make.
For example, a real estate agent is required to make $22,000 of instalments for personal taxes during the year. Final tax bill for April 30th is $24,000 and the client pays the entire $24,000 on or before April 30th. The CRA will still charge interest on the $22,000 that should have been paid at an earlier date.
Granted, on a relative scale, the instalment interest is minor compared to the total taxes payable at today’s interest rates. So, if you would rather keep your money during the year to invest your funds in a project with a higher rate of return, or you forget to make your instalments, your world is in no danger of imploding at year end in terms of interest charges.
However, where people tend to get themselves into trouble is when they bypass making their tax instalments, and fail to save the money to pay their tax bill at the end of the year.
This is a reason why making your tax instalments can be a good idea!
Think of it this way. For those of you who earn employment income – you have your income tax withheld at source, and your CPP and EI (if applicable) on each pay cheque. So at the end of the year, your taxes are predominantly or completely paid because the income tax has already been remitted to the government on your behalf. Instalments work on the same philosophy.
Where failing to make your instalments is a really bad idea is if you are a late filer. For example – yep, picking on real estate agents here again – if you are required to file your personal taxes by June 15th (and taxes are payable April 30th) and you file late AND have missed your instalments, you have just subjected yourself to a late filing penalty! For example 5% late filing penalty on $24,000 = $1,200 plus you will be charged interest on failure to make instalments and 1% interest per month on the outstanding amount payable. So, in this situation, if you had at least made your instalments of $22,000 and still filed late, the late filing penalty would have only been on the $2,000 = $100 penalty…bit of a difference.
It gets worse…
So you are a late filer, a second time – your late filing penalty is now 10%! Plus 2% interest per month the payable is outstanding. This late filing follows you for 3 years. To put it into context, if you file late in 2013, then file late in either 2014, 2015 or 2016 you will be subject to the bumped up rate of 10% and 2%. Or rather, you filed late in 2010, on time in 2011, 2012 but late in 2013 – still subject to the 10% and 2% rates.
And it gets even worse.
Your penalties and interest are non-deductible thus increasing the effective after tax rate cost of non-compliance.
This article is brief in nature, omitting detailed information and exceptions such that the summarized information should not be relied upon without the advice of qualified advisors.
|George E. Dube, CPA, CA