Chapter 2: Instalments (ITA 156)

Question 1

What is the basis for requiring instalments under ITA 156?

Answer 1

Instalment payments are required when amounts to be applied to future income tax liabilities cannot be withheld by the payer from certain types of income, such as business income or RRSP withdrawals.

Question 2

How does ITA 156(1) ensure a continuous flow of tax revenues?

Answer 2

ITA 156(1) requires individuals with income not subject to withholdings, such as business or investment income, to make quarterly instalment payments toward their current year’s income tax liability.

Question 3

What is the “net tax owing” in relation to ITA 156(1.2)(b)?

Answer 3

“Net tax owing” refers to the individual’s total income tax liability for a particular year that exceeds the income tax withheld for that year.

No instalments are required if net tax owing does not exceed the individual’s instalment threshold.

Question 4

What is the “individual’s instalment threshold” under ITA 156(1.1)?

Answer 4

The threshold is defined as $1,800 for residents of Quebec and $3,000 for residents of all other provinces and territories. If the individual’s net tax owing exceeds this threshold, they must make instalment payments.

Question 5

When are individuals required to make instalment payments for a given tax year?

Answer 5

Individuals must make instalment payments for 2024 if their net tax owing is more than $3,000 in 2024, and in either 2022 or 2023.

Question 6

How does “net tax owing” differ for instalment purposes?

Answer 6

For instalment purposes, net tax payable is determined without considering loss carryover taxable income deductions.

Question 7

How does the CRA enforce instalment payment requirements?

Answer 7

The CRA mandates instalment payments not only under ITA but also under the Canada Pension Plan (CPP) and Employment Insurance (EI) Acts, requiring quarterly payments for CPP and EI for self-employed individuals.

Question 8

How are instalment payments determined for the current year?

Answer 8

Instalment payments for the current year are based on an estimate of the net tax owing for that year exceeding $3,000, but actual net tax owing is only determined after the year ends.

Question 9

What is important to consider when estimating current-year net tax owing for instalments?

Answer 9

It is important to be conservative in estimating current-year net tax owing because instalment penalties and interest are based on the actual net tax owing.

Question 10

What happens if a taxpayer underestimates their net tax owing and doesn’t make instalment payments?

Answer 10

If a taxpayer underestimates their net tax owing and it exceeds $3,000 for the year, they may be charged interest for the instalments they should have made.

Question 11

What are the quarterly due dates for instalment payments for individuals in 2024?

Answer 11

The quarterly due dates for instalment payments in 2024 are March 15, June 15, September 15, and December 15.

Question 12

What are the three alternatives for calculating required quarterly instalments under ITA 156(1)?

Answer 12

The three alternatives are:

Alternative 1 – Current Year: One-quarter of the estimated net tax owing for the current taxation year.

Alternative 2 – First Preceding Year: One-quarter of the net tax owing for the immediately preceding taxation year.

Alternative 3 – Second and First Preceding Year: The first two instalments are one-quarter of the net tax owing for the second preceding year, and the last two instalments are based on the remaining difference between the first and second preceding years’ tax owing.

Question 13

What is the benefit of using Alternative 3 – Second and First Preceding Year?

Answer 13

Using Alternative 3 may result in smaller first two instalment payments and larger third and fourth payments, offering some income tax deferral.

Question 14

Why would an individual choose Alternative 1 – Current Year for instalment payments?

Answer 14

If income is declining, Alternative 1 may result in the lowest total instalment payments, though they are based on estimates of the current year’s net tax owing.

Question 15

How can an individual adjust their instalment payments if their income estimates change mid-year?

Answer 15

If income estimates are revised downward during the year, subsequent instalments can be based on the new estimates.

If overpayments have been made in previous instalments, they can be adjusted by reducing future payments.

Question 16

What happens if an individual overpays instalments based on a higher estimate but later revises their net tax owing downward?

Answer 16

The individual can skip or reduce future instalment payments if they have already paid an equivalent amount to cover the new estimate for the year.

Question 17

What is the purpose of CRA instalment reminders?

Answer 17

CRA sends instalment reminders to individuals required to pay instalments.

These reminders help taxpayers avoid interest charges by paying the amounts specified by the due dates, even if the instalments are not required for the year.

Question 18

What approach does the CRA use for instalment reminders, and why?

Answer 18

The CRA uses Alternative 3 – Second and First Preceding Year for instalment reminders because it provides the most accurate and timely information, as current-year and first preceding year data are unavailable in time for the first instalment payments.

Question 19

What are the potential risks of relying on the CRA instalment reminder?

Answer 19

Relying solely on the CRA instalment reminder may lead to overpayment or underpayment of instalments, especially for individuals whose current-year income is significantly different from previous years.

Question 20

What happens if an individual overpays instalments based on CRA instalment reminders?

Answer 20

Overpaying instalments based on CRA reminders essentially provides an interest-free loan to the government, but the taxpayer could avoid this by using current-year estimates if their income is lower than previous years.

Question 21

What happens if an individual underestimates their net tax owing and does not follow the CRA instalment reminder?

Answer 21

If the individual’s actual net tax owing exceeds their estimate, interest will be charged on the shortfall, even if the estimated instalments were paid on time.

Question 22

What will the CRA charge interest on if instalment payments are insufficient?

Answer 22

The CRA will charge interest on the shortfall based on the alternative that results in the lowest total instalment payments for the year, as per ITA 161(4).

This includes interest on any deficiency in instalments that should have been made, but not on excess instalments.

Question 23

How are quarterly instalment payments calculated under Alternative 1 for Mr. Hruba with a 2024 estimated net tax owing of $24,000?

Answer 23

Under Alternative 1, Mr. Hruba would pay $6,000 quarterly ($24,000/4), totaling $24,000 for the year.

Question 24

How are instalment payments calculated under Alternative 3 for Mr. Hruba, with net tax owing of $32,000 in 2023 and $20,000 in 2022?

Answer 24

Under Alternative 3, the first two instalments would be $5,000 each ($20,000/4), and the third and fourth instalments would be $11,000 each [($32,000 - $10,000)/2].