September 15 is the date on which the third quarterly tax instalment must be remitted to CRA, to avoid interest costs on amounts owing for 2016. CRA may have sent a notice, but is the amount shown on it what is really owed? Now is the time to consider the options you have in payment methods and project income for 2016 . . Here are our top three tips for managing quarterly instalments to remit the correct amount, but no more.
- Know What’s Required. The law requires payment of the correct amount of tax, but no more. To begin, estimate your total income for 2016 by using the Knowledge Bureau’s Income Tax Estimator to do so. Click here for a free trial.
- Managing Tax Withholdings. Taxpayers who have employment income and other sources, such as investment and rental income, should review two CRA tax forms specifically designed to ensure that tax withholding properly matches income tax payable.
- The TD1 Personal Tax Credits Return is designed to match tax withholding with personal non-refundable credits. To ensure withholding is not excessive, taxpayers must ensure that they claim for all of their personal tax credits when completing the form. Taxpayers with certain tax deductions, such as RRSP contributions, child care, spousal support, etc. may further reduce withholding by completing form T1213 Request to Reduce Tax Deductions at Source.
- Managing Tax Remittances. Quarterly instalment tax remittances are required only when taxpayers owe more than $3000 at the time their returns are filed. Taxpayers who owe less than $3,000 annually can manage their upcoming balances due on the 2016 tax return as follows:
- Do nothing and pay the balance owing by the filing due date, May 1, 2017 (or June 15, 2017, for unincorporated self-employed people)
- Request additional withholding from other remitters at source (i.e., off the top of payments from CPP, OAS, RRSP or RRIFs)
- Prepay their taxes by making instalment payments
Taxpayers who owe more than $3,000 in the current tax year and one of the prior two tax years are required to make quarterly instalment payments (annual for farmers and fishers). These taxpayers have three options:
- Pay the amount requested by CRA
- Pay one-quarter of their prior-year balance in four equal instalments
- Pay one-quarter of their estimated current-year tax liability in four equal instalments
If the first option is chosen, no penalty or interest will be charged regardless of whether the instalments are insufficient. If either of the other two options is chosen, taxpayers are liable for a penalty for late or insufficient instalments if the amount paid is less than the liability determined when the return is filed.
Year-end Planning Opportunities. Regardless of which method is used, taxpayers should estimate their tax liability prior to the last instalment due date (December 15) to determine whether the last instalment should be reduced or eliminated. This is an important part of all year-end tax planning activities. There is no point in taking money out of the markets and sending it to CRA in December, only to have it returned with no interest when the return is filed months later.
Another option is to review charitable donations for the year and consider transferring publicly traded shares with accrued gains to qualifying charities to take advantage of two tax planning moves: no tax on the capital gain and a charitable donation credit that offsets other taxes payable.
CRA’s instalment amounts for the first two quarters are each 25% of the balance due on the return for the second prior year. The third and fourth instalments are each 50% of the difference between the prior year balance due and the sum of the first two instalments.
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