Have You Paid Advanced Tax? Here’s What CRA Means by Tax Installment Payments

Everyone remembers their first paycheck fondly. The excitement, nervousness, and just the pride of taking your first step towards financial independence – it’s exhilarating! But what most people don’t realize is that their first paycheck also marks another important life milestone – their first day as a taxpaying citizen of the country. Yes, your tax is due from the day you begin earning. Whether you are a salaried employee, a businessman generating revenue, or a landlord earning rent, everybody pays tax. However, many salaried employees may not realize they pay taxes, since their employers withhold it through payroll deductions…… Or until they receive an “instalment reminder” from the Canada Revenue Agency (CRA) to pay a certain amount of outstanding dues before December 15 and March 15 of the ongoing fiscal year.  What is this reminder all about? How can tax be paid in an installment? Who can avail themselves of this provision? Let’s find out.

How Canadians Pay Taxes in Installments

The CRA uses different methods to collect taxes.

For most salaried employees, income taxes, Canada Pension Plan (CPP), Employment Insurance (EI) Premiums, and other statutory taxes are deducted at source by the employer and remitted to the CRA on behalf of the employee. Only after remitting these taxes is the net amount credited to your account, so most people don’t realize they have paid any tax at all. All these details can be found on your T4 slip. 

However, for people whose tax is not withheld in the above manner, they must pay it themselves, and the amount could be substantial. To ease the financial burden of suddenly having to pay the tax in a lump sum, the CRA allows taxes to be paid in quarterly installments for the current tax year. People who tend to use this option for fulfilling their tax obligations include:

• Freelancers, who are self-employed and have no tax withheld for them
• Salaried employees with a personal side business for which tax has to be paid separately
• Business owners
• Landlords earning rental income
• Retirees, especially new ones, have multiple sources of income such as CPP, Old Age Security (OAS) payments, retirement savings, and investments.
• People with income from investments.

When is the Tax Instalment Reminder Generated

The tax is owed when the income is paid, and if insufficient tax is not deducted from payments made to the taxpayer throughout the year, the CRA issues an installment reminder. It generates a reminder only when the amount of tax withheld is at least $3,000 less than the annual tax liability for the current tax year and the previous two tax years. 

For instance, John’s tax liability for 2023 was $5,000, but the tax withheld was $1,500, and a similar amount was withheld in 2024 when his tax liability was $4,500. He may receive an installment reminder if the gap between tax owed and tax withheld is $3,000 or more. 

Note that the installment reminder calculates tax based on the past year’s tax returns. In an ideal scenario, the CRA believes you earn similar to or more than last year. However, if you incur business losses and your current-year tax liability is $3,000 or less, you do not need to pay tax instalments for 2025. 

The tax instalment payments are due quarterly on the 15th of March, June, September, and December. The first half (March and June) instalment reminders are sent in February, and the second half (September and December) reminders are sent in August.

How Much Advance Tax Should You Pay in Installments

When you receive the tax installment reminder, you can choose from the three amounts below that you want to pay.

• Pay the amount specified on the Reminder by the due date. This is the tax amount calculated by the CRA itself. It means, if your 2025 tax liability is more than the advance tax, you won’t be charged interest or penalty. If your 2025 tax liability is less than the advance tax, you will receive a refund.
• Pay the amount that was payable in the previous year. The assumption is that you will earn as much as last year, and the indexation effect on tax slabs will reduce your taxes.
• If there is a significant increase in your income in the current year, consider calculating your estimated tax liability and paying that amount in installments. 

If your final tax liability is greater than the installment amount paid, you will have to pay the outstanding amount by April 30 of the following year. 

How to Reduce Tax Instalment Amount 

You can reduce or eliminate the instalment amounts depending on your source of income. Suppose you are an employee who also earns rental income, you can ask your employer to deduct more income tax from each pay period using Form TD1.

If you are earning pension income, such as CPP and OAS, you can ask the CRA to withhold tax by submitting Form ISP3520 (Request for Income Tax Deductions).

If you face capital or rental loss on your income where tax is not withheld, you need not pay any tax installments, as you didn’t earn any income there.

How Much Interest Is Levied on Late or Insufficient Payment of Tax Installments

While there are situations that allow you to reduce tax installments, you should not ignore or delay them; otherwise, the CRA will impose interest and a penalty.

If late or insufficient tax is paid, the CRA will impose higher interest rates (8% for the first quarter of 2025) from the day the income was earned until the tax is paid, compounded daily. If your instalment interest charges cross $1,000, the CRA may also charge a penalty.

You can reduce the interest expenses by paying your next installment early or overpaying it. The CRA will apply the excess amount to interest charges on insufficient or late payments for the same tax year.

Contact Black and Gill LLP in Etobicoke to Help You with Tax Planning

Talk to a professional accountant to help you calculate your tax liabilities and pay tax installments on time to avoid penalties and interest. At Black and Gill LLP, our accountants and tax experts offer services including tax filing and planning. To learn more about how Black and Gill LLP can provide you with the best accounting and tax expertise, contact us online or call us at 416-477-7681.