The TAX INSTALLMENT dilema
We are half way through the calendar year again, finished the June quarter, and in a lot of corporations this will mean that we need to watch our tax installment requirements closely.
As a general rule of thumb, Canada Revenue Agency, in most cases, requires that a corporation pay instalments when they paid taxes in the previous fiscal year.
As specified by Canada Revenue Agency, the following methods can be used:
No-calculation option – This option is best for you if your income, deductions, and credits stay about the same from year to year.
CRA will provide the no-calculation option amount on the installment reminders that we will send you. CRA will determine the amount of your installment payments based on the information in your income tax and benefit return for the two previous taxation years.
Prior-year option – This option is best for you if your current years income, deductions, and credits will be similar to your previous years amount but significantly different from 2 years ago. i.e the averaging over the 2 years is removed.
Current-year option – This option is best for you if the current year income, deductions, and credits will be significantly different from those in prior years. You determine the amount of your installment payments based on your estimated current-year net tax owing.
INTEREST – If you use the prior-year option and make the payments in full by their 2016 due dates, CRA will not charge instalment interest or a penalty unless the total installment amount due you have calculated is too low.
CASH FLOW PLANNING
While you are going through the year it is important that you keep an active projection as to where your corporate year will end profit wise. An accompanying tax estimate should be prepared and updated quarterly. Monthly as you get closer to your year end.
The projection can and will provide a great guide towards tax requirements and the mitigation of instalment payments. It also ensure that you keep money in your account when times are slower.
If you end up in a position where your year is back end loaded with income, ensure that you maintain your installments to a level that takes that into account.
If your installment projection comes in under the stipulated installment requirement ensure that you estimate on the high end to avoid interest if you potentially end up higher later.
Have you done an assessment of your installment basis this year?
For more details please visit the website of the Canada Revenue Agency –http://www.cra-arc.gc.ca/instalments/
Please note that this post is to be a general guide in assessing tax installment requirements and should by no means be used as tax planning advice. I strongly recommend that you obtain independent advice when it comes to your individual tax strategy and process. This process is descriptive of the Canadian tax law only.
Have you reviewed your tax installment planning lately?
We can help in the planning process
Contact us at
OR complete the form below and we will be in touch.
To develop business strategies for growth & sustainability,
Through leveraging resources and easing commitments.
Peter Teunissen, CPA (ca)
Founder & CEO
– Soon to be released –