This month, certain Canadians will receive unexpected mail from the Canada Revenue Agency (CRA). That mail will contain an unfamiliar form-a 2015 Instalment Reminder. On that form, the CRA suggests to the recipient that he or she should make instalment payments of income tax on September 15 and December 15 2015, and will identify the amount which should be paid on each date.
Unexpected correspondence from the tax authorities is always unsettling, and correspondence which suggests that the recipient owes money to the government even more so. Someone who has never before received an instalment reminder (or, quite possibly, doesn’t even know what a tax instalment is) and who receives mail from the CRA suggesting that tax monies are owed might well be both surprised and worried. The fact is, however, tax instalments are just another way of paying tax throughout the year, rather than when the tax return for that year is filed.
The reason that most Canadians are unfamiliar with instalment payments of tax is that most of them work as employees throughout their working lives and income tax is automatically deducted from their pay “at source”. Their employer deducts an amount for income tax from their gross pay, before any pay cheque is issued, and remits that amount to the CRA on their behalf. When the individual files a tax return the following spring, he or she is credited with those tax payments which were remitted to the CRA on his or her behalf throughout the year. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.
Canadian tax rules provide that where the amount of tax owed when a return is filed by a taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current year and either of the two previous years, that taxpayer may be required to pay income tax by instalments.
The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The figure for the immediate prior year can’t be known until the tax return for that year has been received and assessed by the CRA. The tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder. In many cases, a first instalment reminder is triggered where an individual has retired within the past two years.
Take, for instance, the example of an individual who retired at the end of
2013 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning January 1, 2014, that individual’s sources of income changed from employment income to Canada Pension Plan and Old Age Security benefits, and monthly withdrawals from an RRSP or RRIF, or pension payments from the former employer. In order for the amounts withheld from such income to match the taxpayer’s actually tax liability for the year, the taxpayer would have to have calculated the amount of that tax liability and made arrangements for withholdings to be made from one or more of the three or four income sources, to total that overall tax liability amount. For most taxpayers, that’s not a very likely scenario. Consequently, it would be almost inevitable that correct withholdings would not be made and that tax of more than $3,000 would be owed when the 2014 tax return was filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2015, and it is expected that once again, more than $3,000 will be owed on filing the 2015 return, the criteria for the instalment requirement could be met, and a first tax instalment reminder could be issued for the taxpayer in August 2015.
For taxpayers who’s income has not changed in 2015 from 2014, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2015, he or she will of course receive a refund on filing.
A second option available to the taxpayer is to estimate the amount of tax which he or she will owe for 2015 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2014 to 2015 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach on their own, can use the tax instalment calculation tool available on the CRA website at By clicking here or can obtain information on federal and provincial tax rates and brackets for 2015 on the CRA website by clicking here. Taxpayers who choose this option should pay 50% of the total amount owed on September 15, 2015 and the remaining 50% on December 15, 2015.
Many taxpayers who receive an Instalment Reminder are less than pleased about the fact that they are being asked to, as they see it, pay their taxes “early”. However, the reality is that most of them have been paying income taxes “early” throughout their working lives, by means of source deductions.
Source deductions are, however, more or less invisible to the taxpayer, as they are taken before any paycheque is issued, and actually writing a cheque or making an e-payment to the CRA for taxes feels much different.
While no one actually likes paying taxes, by any method, making tax payments by instalments can actually help taxpayers, particularly those who are juggling multiple income sources for the first time, with budgeting and managing cash flow. Because most Canadians don’t have to think about setting money aside for income taxes during their working lives, they don’t always include them (or include them in sufficient amounts) when planning a budget when they first retire. There are few financial surprises more unwelcome than finding out that a large amount is owed when the tax return for the year is filed. For most, it’s an annoyance and an aggravation. For those who live on a fixed income, however, being faced with a significant bill for taxes owed on filing can create real financial hardship. Receiving an Instalment Reminder serves to give notice that if taxes are not being withheld from income amounts paid to the taxpayer throughout the year it is necessary to make some provision for those taxes.
In summary, if your income will be similar in 2015 as it was in 2014, please pay the amounts indicated on the Instalment Reminder notice issued by the CRA on or before the due dates. If your income in 2015 is expected to be less than what it was in 2014, please contact your accountant at White Kennedy so he or she can assist you in calculating revised instalment amounts in order to avoid any potential deficient instalment interest charges by not making sufficient instalments.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.