Filing a tax return is about what you keep. So is the pre-payment of income taxes throughout the year. This month that’s an important concept as the September 15 quarterly tax instalment payment is due on Monday, September 16.
If you are an individual employee, the objective is to get the biggest refund possible—in other words, get the government to give back to you as much of the withholding taxes taken from your paycheque as possible. It’s your first step to incredible wealth.
But if you are responsible for remitting your own taxes—because you have self-employment income, taxable alimony, large sources of investment income, and so on—the rules are the same. Be sure you pay only the correct amount.
There are two methods of estimating the instalment amount:
Current-Year Option: Under this option, you estimate your income tax liability for the current taxation year and, if the estimate exceeds $3,000, then one-quarter of the estimated amount is due on each of the four due dates: March 15, June 15, September 15, and December 15.
Prior-Year Option: Under this option, the first two instalments are estimated at one-quarter of the taxes due in the second prior year (since the prior year’s return is not available when these instalments are due) and the last two instalments are calculated at one-half of the excess of taxes due in the prior year over taxes due in the second prior year.
The CRA will automatically send you instalment notices using the prior-year method. If you make the payments as outlined in the instalment notices on time, no interest will be charged until April 30 even if the amount is insufficient to cover the taxes owing. If you use the current-year option and underestimate your tax liability (or if you fail to make the requested instalments), you’ll be charged interest on the late or deficient instalments as well as arrears interest.
Think about it…if you are financially focused and invest that average tax refund of $1,659 you’ll get back every year over the course of your working lifetime—let’s say that’s 40 years—you will have $66,360 more in savings to live your dreams with.
Invested at a 4% interest rate, that tax refund will grow to $160,770 in a TFSA, or $131,600 in a non-registered account, assuming a tax rate on income of about $45,000. (Remember your tax calculations will change depending on your province of residence.)
It’s Your Money. Your Life. Astute taxpayers know that when you do the math, over time, a six-figure sum could stay in your pocket to build your own wealth, rather than volunteering the amount to the government, interest-free.
Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.” Follow Evelyn on Twitter at @EvelynJacks.