Tax Tip: CRA INSTALMENT NOTICES

Many individuals received unusually high incomes in 2015 as a result of triggering capital gains or taking extra dividends and/or salary from their corporation to avoid being subject to the higher tax rates taking effect in 2016. 

When tax returns for 2015 were filed, many of these individuals would have been required to make a substantial tax payment in April of 2016 since their 2015 withholding's and installment payments were not sufficient to cover the additional income. In general, if that April payment upon filing was greater than $3,000, CRA will request those individuals to make installment payments during the 2016 year.

Installment reminders are sent out by CRA (usually in August) and may ask for large amounts to be paid in September and December of 2016. Those amounts are based on the income from the 2015 year. The first few installment requests in 2017 may also be based on 2015 income levels. If the taxpayer€s income in 2016 is, or will be lower than 2015, the installments per the notices may significantly exceed the taxpayer€s expected 2016 liability. It is important to note that there are alternatives to paying the recommended installment amount included on the notice.

One such possibility is to pay installments based on the expected tax liability for the 2016 year. If there has been a significant decrease in income, this method may free up large amounts of cash that may otherwise have been tied up in installment payments and only returned upon CRA processing of the 2016 personal tax return.

Where CRA's requested installments are remitted, no installment interest will be charged. Installments based on 2016 taxes must be made equally by March 15, June 15, September 15 and December 15 to avoid installment interest. If no payments were made for March and June, remitting payments for September and December can offset the late payment of the earlier amounts. Paying early, and/or paying more than the expected 2016 taxes, will reduce the potential of interest for late payments, and provide a cushion in case actual 2016 taxes exceed the estimated amount.

Action Item: Review your 2015 and expected 2016 tax situation to determine appropriate instalment payments.