Why does my corporation have to pay installments each month?
A corporation has to pay monthly federal installments if, in the immediately preceding fiscal year, federal taxes payable exceeded $3,000, or if in the current year you estimate that federal taxes will be in excess of $3,000. Likewise if provincial taxes in the immediately preceding year or current year are in excess of $3,000 provincial installments will be required.
CRA does not have a crystal ball and so they cannot predict what your taxes are in advance of you submitting your tax return. Therefore, rather than waiting for you to tell them how much you owe, they assume that you will earn the same profit as last year and require you to make monthly installments based on the prior year’s tax charge. (There are another two methods to calculating installments, but they are a little more complicated than just basing it on last year’s return). If you have paid the installments each month and you have made more profit than the previous year you generally have a further three months from the year end to pay the remaining taxes.
There are a couple of exceptions to this where this final installment has to be paid within two months of the year, such as if your profit in the previous year was in excess of $500,000.
Failure to pay installments on time will mean that CRA will charge you interest at a prescribed rate, currently 5%, but the rate can change quarterly.
One of our many initiatives is to advise our clients when they have to pay installments, how much they have to pay and remind them when their three month deadline is, so that they can pay all installments on time and avoid interest.
If you have concerns over the amount of tax you owe, please contact us for more help.Download a copy of this issue