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New Rules for Tax Instalments Over the course of the next few weeks, millions of Canadians will receive an “Instalment Reminder” from the Canada Revenue Agency (CRA), and it’s a reasonable assumption that many of them won’t know what their options are with respect to that reminder. As well, there have been changes made recently in the rules governing tax instalments, and it’s possible that taxpayers who have been required to pay by instalments in the past may not be subject to the same requirements in 2008. Tax instalments are, essentially, a way for the CRA to collect income tax payable throughout the year, rather than in one lump sum on filing. For most Canadians, who are employed by another party, tax is deducted “at source” from their paycheques and sent by the employer to the CRA. Others – generally, the self- employed or those receiving much of their income from investments or, possibly, from pensions – may not have income tax (or sufficient income tax) deducted at source, and the CRA is disinclined to wait until tax-filing time to receive its due from those taxpayers. They will, instead, request that payments be made by instalment, four times each year, on the 15th day of March, June, September, and December. There are, of course, rules governing who will receive an instalment reminder from the CRA, and it is those rules that were the subject of changes announced in last year’s federal Budget and are effective beginning in 2008. Prior to the changes, a taxpayer would be subject to instalment payments where the tax payable on filing in the current year and either of the two previous taxation years was more than $2,000. So, for 2007, an instalment reminder would be issued for a taxpayer who was likely to have to pay more than $2,000 on filing for 2007 and was required to pay a similar amount on filing in either of 2006 or 2005. For 2008, however, that threshold is increased to $3,000, so that a taxpayer, in order to be subject to the instalment requirement this year, would have to have paid over $3,000 in tax on filing in either 2006 or 2007 and anticipate doing so again in 2008. Taxpayers who receive an instalment reminder from the CRA have three options open to them. The first, and easiest, is to pay the amounts outlined on the instalment reminder by the specified due dates. A taxpayer who chooses this option can be assured that he or she will not be subject to any interest or penalty assessments, even if the amount of tax which is eventually owed for the year turns out to be more than the total of instalments paid. Alternatively, the taxpayer who believes either that he or she will not be subject to an instalment payment requirement for the year (usually because the tax anticipated to be payable on filing in the current year will be under the threshold amount of $3,000) or that the instalment amounts identified by the CRA are greater than his or her actual tax liability for the year can pay less than the specified amount, or even nothing at all. These two approaches, however, carry some risk of becoming liable for interest or penalties. A taxpayer who receives an instalment reminder and does not pay the full amount outlined on that reminder will be assessed interest – and, possibly, penalties – if there turns out to be a balance payable on filing. Interest and penalty costs assessed in such circumstances can be substantial, as the interest rate levied by the CRA is in excess of commercial rates of interest, and interest on outstanding amounts is compounded daily. The interest rate payable on late or deficient instalment payments for the first quarter of 2008 is 8%. In some circumstances, a taxpayer who is not actually required to make instalment payments of tax may nonetheless choose to do so voluntarily. It may seem counter-intuitive to pay taxes before they are due, but it may make sense in some cases. The typical case is that of a newly retired taxpayer who has spent 40 or more years as an employee, having tax calculated and deducted at source from every paycheque and remitted by the employer. Such taxpayers are often surprised to find, following their first year of retirement, that a large amount of tax is due and payable on filing, since insufficient tax (or even no tax) has been withheld from their pension and/or investment income. It’s a very unwelcome surprise, particularly for a taxpayer who is living for the first time on a fixed income and who hasn’t set any funds aside to pay a large tax bill. Such taxpayers may wish to make a rough estimate of their tax liability for the year and to pay that amount in instalments throughout the year, to forestall a large balance owing on filing. Depending on the source of income, it may also be possible to set up regular withholdings from income received throughout the year, in much the same way as is done for a paycheque. For instance, taxpayers who are receiving Canada Pension Plan or Old Age Security payments can file Form 3520 (available at http://www1.servicecanada.gc.ca/eforms/forms/ 2006/isp3520ecpp.pdf) with Service Canada, requesting that a specific amount be withheld from those payments. Alternatively, withholding from CPP or OAS can be arranged by telephone – the federal government’s toll-free line for doing so is 1-800-277-9914. Taxpayers who receive private pension benefits from an employer-sponsored pension plan may provide the pension plan administrator with a completed Form TD1, 2008 Personal Tax Credits Return. Tax withholdings cannot, however, be arranged where the income is received from investment, capital gains, or rental income sources. Taxpayers who do make instalment payments have a number of payment methods available to them. Those who receive an instalment reminder from the CRA can take the instalment remittance voucher that is included in the instalment reminder package to any financial institution in Canada and make the payment there without charge (even if the amount differs from that outlined on the reminder). However, financial institutions cannot accept instalment payments from taxpayers who do not have a remittance voucher issued by the CRA. An instalment payment can, however, be made, with or without an instalment reminder, at any of the CRA’s Tax Services Offices, a listing of which can be found on the CRA Web site at http://www.cra-arc.gc.ca/contact/tso-e.html. It’s also possible to pay your tax instalments online, through your financial institution’s Internet banking facilities. And, of course, a cheque (never cash) can always be mailed to the CRA. Taxpayers who avail themselves of either of the last two options should ensure that that online payment is made, or the cheque is mailed, in sufficient time to ensure that payment is actually received by the CRA on or before the due date; otherwise, late interest charges, and possibly penalties, will result. Note that interest and penalties are only charged where the taxpayer has received an instalment reminder and did not make any instalment payments or payments made were insufficient or late. No one likes paying taxes, and many taxpayers, particularly those facing instalment requirements for the first time, sometimes feel as though they are being treated unfairly in being asked to pay their taxes “early”. That’s not really the case, as most taxpayers, throughout their working lives, have paid taxes weekly, biweekly, or monthly with every paycheque. And nearly everyone would agree that it’s easier to budget for payment of one-quarter of one’s tax liability for the year every three months than it is to try to come with the funds to pay a very large tax bill on April 30.
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