Instalments Payment Of Income Tax Under Income Tax Act

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Instalments Payment Of Income Tax Under Income Tax Act

As per Income Tax Act, the Corporations in Canada need to comply with the installment payment of taxes subject to certain conditions.

Installment payments of taxes during the current tax year are a kind of advance payment of taxes on the income which a corporation earns during the relevant current tax year.

The installment payments by a Corporation is a measure to bring the corporations at the same footing like an individual taxpayer for e.g. an employee whose taxes are deducted / withheld from monthly payrolls. The positive aspect of the instalment payment of taxes is that these monthly / quarterly payments to CRA reduce the year end burden of paying the tax in lump sum.

Who should pay Installment Tax – Tax payable more than $3000:-

The CRA has set down following 2 limits for every Corporation whose total taxes payable for the tax year under laid down provisions (i.e. Part I, II.2 VI and Part XIII.1 - before allowing current year refundable tax credits) exceeds:-

  • If Current Year Estimated Tax payable is over $3,000 and
  • Previous Year Tax Payable was also over $3,000

Therefore, first of all every Corporation must check, whether it is liable to pay instalment tax on the above two grounds. If either of the above condition is not satisfied, then the corporation is not mandatorily required to pay instalment taxes.

So even if the corporation is expecting higher profits leading to high tax payments on the profits but there was no tax payable in the last year or was less than $3,000, then in such a case there shall be no instalment tax during the current reporting tax year.

Federal and Provincial Tax Payable:-

Interestingly, the liability to pay installment tax (under Federal and Provincial) is tested on Federal as well as Provincial basis separately because the limit of over $3,000 is applicable to both taxes separately. So if the Corporation has the Federal Tax Liability higher than $3,000 but not the Provincial Tax, then in such a case the Corporation is required to pay instalment tax for the Federal Taxes only and not for the provincial tax.

Exemption to New Corporation: The New Corporations in Canada is exempted from payment of advance / installments of income Tax during the first year of its incorporation. The new Corporation has to pay installments of taxes from the start of second year of operation.

Installment of Tax for New Incorporation is only in the following circumstances:

  • Second year of operations of the Corporation and
  • The tax payable is more than $3,000 in the current tax year

Calculation of Installment Payments:- All Corporations have 3 options to calculate tax and pay the least of the following amounts

Option

Calculation Base

Monthly Instalments

Quarterly Instalments

A

Current Tax Year’s Estimated Tax Payable

1/12 or 8.33% of the estimated current year’s tax payable

1/4 or 25% of the estimated current year’s tax payable

B

Previous Year’s Actual Tax Payable

1/12 or 8.33% of the previous year’s tax payable

1/4 or 25% of the previous year’s tax payable

C

A combination of previous year and the year before the previous year’s tax payable

First 2 months of the Year: 1/12 or 8.33% of the year before the previous year’s tax payable

Next 10 months - 1/10 or 10% of (the previous year’s total tax payable less total of first 2 instalments)

First Quarter of the Year: 1/4 or 25% of the year before the previous year’s tax payable

Next 3 Quarters – 1/3 or 33.33% of (the previous year’s total tax payable less total of first 1 instalment)

Monthly or Quarterly Instalments payments:-

The payment of instalments on monthly basis or quarterly basis depends on the status of the corporation. A CCPC has an advantage of making quarterly payment of advance tax subject to fulfillment of certain conditions i.e. CCPC has perfect tax compliant history etc.

Due Date of Installment Payments

 Corporation Tax Year

Monthly Instalments

Quarterly Instalments

Calendar Year Corporation

i.e. 1st Jan to 31st Dec

Last day of the month e.g.

31st Jan,

29th Feb,

31st Mar and so on

Last day of the Quarter e.g.

31st March,

30th June,

30th September and

31st December

Other than Calendar Year Corporation e.g. 15th July to 14th July

Last day of the first month and subsequent each month end on the same date

14th Aug,

14th Sep,

14th Oct and so on

Last day of the first quarter and subsequent each quarter end on the same date

14th Oct,

14th Jan,

14th Apr and 14th Jul

Payment of Balance Tax due / payable:

If after paying the instalments, there are any dues left towards the payment of tax for the current year then the same shall be paid within 2 months / 3 months (as the case may be) after the end of the tax year.

The aim of the above article is to briefly explain the ‘Installment payments of Tax’ payable by Corporations in Canada and compliance with the T2 Tax Return Filing.

The Author of the above Article is a CPA / Tax Accountant who is engaged in providing Accounting, Tax & other advisory service including issue of T4, T4A, T5 etc., T1 Tax Return Filing, T2 Tax Return filing, Payroll Accounting Services, Bookkeeping and Accounting Services, CFO Services, GST HST Consultant.