Next Friday, June 15, is an important tax date, not only for those who are self-employed (your 2017 tax return is due then) but also for those taxpayers who are required to pay taxes by quarterly instalments.
If you’re one of those taxpayers, hopefully you didn’t simply hang up if you recently received an automated telephone message purporting to be from the Canada Revenue Agency because chances are it was actually from the CRA.
At the end of May, the CRA starting sending automated telephone messages to certain taxpayers who may be required to pay their tax by quarterly instalments and have either missed a payment or been charged instalment interest in the past, to remind them of the June 15 due date.
The messages will continue to be sent through Monday. The message neither includes any personal taxpayer information nor does it ask for any. Note that since the due-date reminder message is not a telemarketing call, the National Do Not Call List, which allows Canadians to opt out of receiving telemarketing calls, does not apply. (You can still, however, opt out of these calls by contacting the CRA yourself.)
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The instalment system is a tricky one and doesn’t apply to everyone. For example, if you’re an employee and your employment is your main, if not only, source of income, then you likely don’t have an obligation to make quarterly instalments. But, if you earn self-employment income, net rental income, investment income or realize capital gains in your non-registered account, you may have an obligation to pay tax by instalments. Failure to do so can result in arrears interest and, in some cases, instalment penalties.
Under the technical tax rules, quarterly tax instalments (due March 15, June 15, Sept. 15 and Dec. 15) are required for 2018 if your “net tax owing” this year will be more than $3,000 ($1,800 for Quebec tax filers) and was also greater than $3,000 in either 2017 or 2016. The definition of net tax owing is effectively your net federal and provincial taxes, less income tax withheld at source. If are you self-employed, your instalments must include any CPP contributions and voluntary EI premiums.
You have three methods to determine how much you need to pay each quarter: the no-calculation method, the prior-year method and the current-year method. You can choose the one that results in the lowest payments.
Under the no-calculation option, the CRA calculates your March and June instalments based on 25 per cent of the net tax owing on your 2016 assessed return. The Sept. 15 and Dec. 15 instalments are then calculated based on the net tax owing from your 2017 return, less the March and June instalments you already paid. Provided you stick to the amounts the CRA tells you to pay and you remit the amounts on time, no interest or penalties will be assessed, even if you do end up owing some additional tax when you file your 2018 return next spring. If your income, deductions and credits don’t vary much from year to year, this is the simplest option.
By contrast, the prior-year option bases the calculation solely on last year’s (2017) income. You calculate your 2018 instalments based on your 2017 tax owing and pay 25 per cent of the amount on each instalment date. Choose this option if you estimate that your 2018 income, deductions and credits will be very similar to 2017 but significantly different than 2016.
Third, under the current-year method, you can simply base your 2018 instalments on the amount of estimated tax you think you will owe in 2018. Simply pay one-quarter of your estimated amount on each of the four instalment dates. This option is useful if the income source that gave rise to instalments in a prior year no longer applies. For example, if you’ve sold your rental property last year and no longer have significant income not subject to deductions at source, you may not need to make any 2018 instalments, despite receiving a call or instalment reminder from the CRA. But be warned because if your estimate is inaccurate and you make instalments that are lower than the no-calculation option above, you could be hit with arrears interest.
If that happens, you do have the right to object and go to court. But, as a recent tax case shows, simply ignoring the CRA instalment reminders could be a costly error.
The case involved a taxpayer who was assessed arrears interest because he failed to pay the required tax instalments for the 2013 tax year. The Tax Court found that the taxpayer was indeed required to pay instalments of tax due and since he did not do so on a timely basis, he was liable for interest. The taxpayer appealed this decision to the Federal Court of Appeal, which released its decision late last year.
The court simplified the rule: the taxpayer is off the hook for instalments provided his “net tax owing for the particular year (2013), or for each of the 2 preceding taxation years (here 2011 and 2012), does not exceed the individual’s instalment threshold ($3,000) for that year.”
In court, the taxpayer admitted that his net tax owing for the 2013 taxation year was greater than $3,000, namely $6,207.75. The taxpayer’s net tax owing for the 2011 taxation year was also over $3,000.
The taxpayer submitted that he was “misled” by instalment reminders sent out to him by the Canada Revenue Agency. He submitted that the notices told him his net tax owing for 2013 was only $2,888.
The Tax Court, however, found that the notices actually told him that $2,888 was the total of the instalments he was required to make, not his net tax owing for 2013. Thus, the Tax Court and, subsequently, the appellate court found that the reminders were not misleading and upheld the arrears interest charged.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto. Jamie.Golombek@cibc.com