Chapter 2: Returns and Payments

Question 1

What is ITA 150(1)?

Answer 1

ITA 150(1) requires all taxpayers (individuals, corporations, and trusts) to file an income tax return for the year.

Question 2

What conditions trigger the filing of an income tax return for individuals under ITA 150(1)?

Answer 2

Income tax is payable,

claiming a refund,

directed by CRA to file,

making an RRSP contribution,

disposing of capital property,

realizing a taxable capital gain,

splitting pension income,

contributing to CPP/EI,

or qualifying for government benefits.

Question 3

What are “Nil Returns”?

Answer 3

Nil Returns are income tax returns with no income tax payable but filed to ensure benefits continue, like the Canada Child Benefit.

Question 4

What is the “SimpleFile” service?

Answer 4

Introduced in 2024, “SimpleFile” allows low- or fixed-income individuals to file tax returns with a simple phone call, expanding on the “File My Return” program.

Question 5

What is the difference between NETFILE and EFILE?

Answer 5

NETFILE allows individuals to file personal income tax returns through certified tax software, while EFILE is for tax preparers to file returns for their clients.

Question 6

What is the general rule for filing income tax returns for individuals in Canada?

Answer 6

As per ITA 150(1)(d)(i), individuals must file their income tax return on or before April 30 of the following calendar year unless the due date falls on a weekend, in which case the next business day applies.

Question 7

What happens if April 30 falls on a weekend

Answer 7

The due date extends to the next business day.

Question 8

What is the filing due date for individuals carrying on a business?

Answer 8

The filing due date is extended to June 15 of the following year (ITA 150(1)(d)(ii)).

Question 9

Does the extended filing deadline for individuals who carry on a business apply to spouses?

Answer 9

Yes, it applies to the spouse or common-law partner if they are cohabiting throughout the year and either spouse has business income.

Question 10

When are payments due for individuals carrying on a business?

Answer 10

Even though the filing deadline is extended to June 15, payments for amounts owing must still be made by April 30 to avoid interest (ITA 248(1)).

Question 11

What happens if an individual does not pay the amount owed by April 30?

Answer 11

Interest will be charged on any unpaid balance at the prescribed interest rate until the balance is paid.

Question 12

If Brandon Katarski earns business income as a sole proprietor in 2024, when is his tax return due, and when must payment be made

Answer 12

His tax return is due June 15, 2025, but payment is due by April 30, 2025, to avoid interest on amounts due.

Question 13

If Brandon’s spouse has no income tax liability for 2024, when does her income tax return need to be filed?

Answer 13

Brandon’s spouse still needs to file by April 30, 2025, to maintain benefits like the Canada Child Benefit and the quarterly GST/HST credit.

Question 14

What is ITA 150(1)(b) concerning deceased individuals?

Answer 14

ITA 150(1)(b) states that if an individual dies after October of the year, their final tax return is due six months after the date of death, instead of the regular tax filing deadline.

Question 15

What happens to the tax return filing date if an individual dies between November 1st and April 30th?

Answer 15

If an individual dies between November 1st and April 30th, the final tax return for the previous year must be filed six months after the date of death.

Question 16

How does the tax filing extension apply to individuals carrying on a business who die after December 15?

Answer 16

If an individual carrying on a business or with a cohabiting spouse carrying on a business dies after December 15, the six-month extension does not apply to the tax filing due date of June 15

Question 17

How is the filing date affected for an individual who dies while carrying on a business with a June 15 filing date?

Answer 17

The filing date becomes the later of June 15 or six months from the date of death.

Question 18

If an individual dies while carrying on a business on May 2, 2025, what is the extended filing date for their 2024 income tax return?

Answer 18

The extended filing date would be November 2, 2025, which is six months from the date of death.

Question 19

What happens to the tax return for 2025 if an individual dies partway through 2025?

Answer 19

A separate income tax return must be filed for 2025, as it will be the individual’s final tax return, with the filing extension not applying to the 2025 year.

Question 20

What does ITA 153 require employers to do regarding income tax withholdings?

Answer 20

ITA 153 requires employers to withhold taxes from salaries, wages, and other remuneration and remit these to the federal government within a certain period of time.

Question 21

How is the amount withheld by an employer determined?

Answer 21

The amount withheld by an employer is specified in Part 1 of the ITRs and depends on dollar amounts and payment frequency, using CRA’s payroll deduction tables.

Question 22

What form do employees fill out to reduce the base on which source deductions are calculated?

Answer 22

Employees fill out form TD1, “Personal Tax Credits Return,” annually for both federal and provincial/territorial purposes to reduce the base for source deductions.

Question 23

How can taxpayers adjust their income tax withholdings under ITA 153?

Answer 23

Taxpayers can either request an increase in withholdings or a reduction using form TD1.

This is useful if they reside in a province with a different tax rate or have large support payments not subject to withholding.

Question 24

Why might an individual request additional withholdings each pay period?

Answer 24

An individual might request additional withholdings to avoid a large tax liability at the end of the year or to avoid the need to pay tax instalments.

Question 25

What happens if a taxpayer has significant recurring deductions from income, like RRSP contributions or spousal support payments?

Answer 25

These deductions are not listed on TD1 as credits, but taxpayers can request a reduction in withholdings by providing proof of these deductions, which would lower their taxable income.

Question 26

How can a taxpayer request a reduction in income tax withholdings from their employer?

Answer 26

A taxpayer can use form T1213, “Request to Reduce Tax Deductions at Source,” to request a reduction in income tax withholdings, and the CRA may authorize the employer to reduce the withheld amount.

Question 27

What is ITA 153(1.1) regarding reduced income tax withholdings?

Answer 27

ITA 153(1.1) states that the minister is required to allow reduced withholdings only if withholding the standard amount would cause “undue hardship.”

Question 28

What other types of payments, besides wages and salaries, require withholdings under ITA 153?

Answer 28

ITA 153 requires withholdings on payments such as:

Retiring allowances

Death benefits

Payments from Registered Retirement Savings Plans (RRSPs)

Payments from Registered Education Savings Plans (RESPs)

Question 29

What does ITA 153(1) state about non-residents providing services in Canada?

Answer 29

ITA 153(1) requires non-residents offering their services in Canada to be subject to the same income tax withholdings as Canadian resident employees.

Non-residents providing non-employment-related services in Canada are also subject to a 15% withholding on gross fees paid.

Question 30

How can non-residents recover overpayment of Canadian income tax?

Answer 30

Non-residents can file a Canadian income tax return to recover any overpayment or apply for a treaty-based waiver if their home country has a tax treaty with Canada that exempts them from withholdings.

Question 31

What does ITA 153(1) require regarding information returns?

Answer 31

ITA 153(1) requires any person making a payment described in ITA 153(1) to file an information return to the CRA, typically in the form of a T4, T4A, or other information slips.

Question 32

What are the differences between a T4 slip and a T4A slip?

Answer 32

A T4 slip details employment-related withholdings, while a T4A slip applies to pension, retirement, annuity, and other income.

Question 33

What does ITA 153(1)(g) specify about payments for services?

Answer 33

ITA 153(1)(g) specifies that fees, commissions, or other amounts paid for services (such as legal, accounting, plumbing, etc.) require the business owner to file an information return with the CRA, even if no withholdings are required.

Question 34

What are the consequences of failing to file an information return as required by ITA 153(1)?

Answer 34

Failure to file an information return as required can result in penalties.

Question 35

What is the basis for requiring instalments under ITA 156?

Answer 35

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 36

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

Answer 36

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 37

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

Answer 37

“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 38

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

Answer 38

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 39

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

Answer 39

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 40

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

Answer 40

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

Question 41

How does the CRA enforce instalment payment requirements?

Answer 41

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 42

How are instalment payments determined for the current year?

Answer 42

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 43

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

Answer 43

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 44

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

Answer 44

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 45

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

Answer 45

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

Question 46

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

Answer 46

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 47

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

Answer 47

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

Question 48

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

Answer 48

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 49

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

Answer 49

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 50

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

Answer 50

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 51

What is the purpose of CRA instalment reminders?

Answer 51

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 52

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

Answer 52

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 53

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

Answer 53

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 54

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

Answer 54

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 55

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

Answer 55

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 56

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

Answer 56

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 57

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

Answer 57

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

Question 58

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 58

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].

Question 59

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?

Answer 59

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).

Question 60

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?

Answer 60

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.

Question 61

How would instalment payments for Jesse Forbes be calculated under Alternative 1 based on an estimated net tax owing of $64,000 for 2024?

Answer 61

Under Alternative 1, Jesse would pay $16,000 quarterly ($64,000/4) in 2024.

Question 62

When is interest charged on unpaid amounts for individual taxpayers?

Answer 62

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)).

Question 63

How is compound daily interest applied to unpaid amounts?

Answer 63

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.

Question 64

How is interest calculated if a taxpayer misses an instalment payment?

Answer 64

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.

Question 65

What happens if a taxpayer overpays an instalment?

Answer 65

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.

Question 66

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?

Answer 66

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.

Question 67

What is the base rate for interest under the ITA?

Answer 67

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%.

Question 68

What is the base rate plus 2% used for?

Answer 68

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.

Question 69

When is the base rate plus 4% applied?

Answer 69

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.

Question 70

What restriction does ITA 18(1)(t) impose on claiming interest as a deduction?

Answer 70

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.

Question 71

Why would it make sense for a taxpayer like Jasmine Ho to prioritize paying off credit card debt over paying her income tax instalment?

Answer 71

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%).

Question 72

What is the penalty for late filing of an income tax return?

Answer 72

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.

Question 73

How is the late filing penalty increased if the taxpayer has been assessed penalties in the past three years?

Answer 73

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.

Question 74

What is the Late or Deficient Instalments Penalty?

Answer 74

The penalty is equal to 50% of the amount by which the interest on late or deficient instalments exceeds the greater of $1,000 or 25% of the interest that would be owing if no instalments had been made.

Question 75

What is the due date for balance owing for living individuals?

Answer 75

The balance owing is due on April 30 of the year following the tax year, regardless of whether the individual qualifies for the June 15 filing due date.

Question 76

What is the balance due date for a deceased individual?

Answer 76

The balance due date for a deceased individual is generally April 30 of the calendar year following the year of death.

If death occurs after October or between November 1 and April 30, the balance due date is extended by six months.

Question 77

When must the final income tax return for a deceased individual be filed if death occurs after October of the tax year?

Answer 77

The final tax return must be filed by six months after the date of death.

Question 78

If Joanne Rivers dies on March 31, 2025, what are the due dates for filing her final returns and paying the balance owing?

Answer 78

Joanne’s 2024 tax return is due by September 30, 2025, and the final 2025 return is due by June 15, 2026, with any balance owing for 2025 due by April 30, 2026.