Chapter 2: Interest and Penalties (ITA 161, 162, etc.) Flashcards
What would be the minimum quarterly payments for Marlene Carter, who has net tax owing of $4,000 in 2023, $1,500 in 2024, and exceeded the $3,000 threshold in 2022?
Since Marlene’s estimated 2024 tax owing is less than $3,000, she is not required to make instalment payments.
However, if her actual net tax owing for 2024 ends up being $6,000, she should have made quarterly payments of $1,500 each ($6,000/4).
Is John Lee required to make instalment payments for 2024, assuming he has net tax owing of $4,500 and has owed less than $3,000 in both 2022 and 2023?
No, John is not required to make instalment payments for 2024, as his net tax owing does not exceed the $3,000 threshold in 2023 or 2022.
How would instalment payments for Jesse Forbes be calculated under Alternative 1 based on an estimated net tax owing of $64,000 for 2024?
Under Alternative 1, Jesse would pay $16,000 quarterly ($64,000/4) in 2024.
When is interest charged on unpaid amounts for individual taxpayers?
Interest is charged on:
Any balance owing on April 30 for the previous year’s income tax.
Any portion of a required instalment payment not remitted on the due date.
All penalties, such as those for late filing (ITA 161(11)).
How is compound daily interest applied to unpaid amounts?
Compound daily interest is charged starting from May 1 for any amounts owing from April 30, and from the date the instalment was due for deficient instalments.
The interest accrual continues until the amount is paid.
How is interest calculated if a taxpayer misses an instalment payment?
Interest is calculated on the instalment payment not made by the due date, continuing until the balance is paid or offset.
For example, if Marissa misses her December 15 instalment, interest will accrue from December 15 to April 30 and further on any remaining balance.
What happens if a taxpayer overpays an instalment?
Any overpayment creates notional interest, which is used only to offset interest on deficient instalments. Notional interest cannot be refunded or used to offset other tax liabilities.
In Marissa’s case, what will happen if she misses her December 15 instalment payment of $2,000 but later files her income tax return showing a balance owing of $5,000?
Marissa will be charged interest on the missed $2,000 instalment from December 15, 2024, to April 30, 2025.
She will also owe interest on the $5,000 balance from May 1 to the date she pays it.
What is the base rate for interest under the ITA?
The base rate is the prescribed interest rate used for most purposes, such as calculating interest benefits on loans to employees and shareholders, except for amounts owed to the CRA.
For 2024, the base rate for the first two quarters was 6%.
What is the base rate plus 2% used for?
The base rate plus 2% applies when the CRA calculates interest on refunds owed to individuals and trusts (not corporations).
This 2% is added to the base rate for the applicable quarter.
When is the base rate plus 4% applied?
The base rate plus 4% applies when calculating interest on late or deficient instalments, unpaid source deductions, and amounts owing to the CRA by individuals, trusts, and corporations.
What restriction does ITA 18(1)(t) impose on claiming interest as a deduction?
ITA 18(1)(t) prohibits any interest or penalties charged under the ITA and ETA from being claimed as a business or property deduction, meaning the interest charged represents a full economic cost to the taxpayer.
Why would it make sense for a taxpayer like Jasmine Ho to prioritize paying off credit card debt over paying her income tax instalment?
Jasmine would reduce her total interest costs because the interest rate on her credit card debt (around 20%) is significantly higher than the current rate on late income tax instalments (10%).
What is the penalty for late filing of an income tax return?
The penalty is 5% of the unpaid tax at the filing due date, plus 1% for each full month the return is late, up to 12 months.
If the taxpayer is entitled to a refund, no penalty applies.
How is the late filing penalty increased if the taxpayer has been assessed penalties in the past three years?
If the taxpayer has a history of late filings, the penalty increases to 10% of the unpaid tax, plus 2% per complete month, up to a maximum of 20 months.
