The tax season is the busiest time as all corporations and individuals compile their financial data to file taxes and pay any tax dues before the April 30 deadline. If your tax bill is hefty and you don’t have the cash to pay that bill, the Canada Revenue Agency (CRA) will charge interest on late payments. To avoid this surprise tax bill, the CRA introduced corporate tax installments, wherein you pay your annual tax in equal monthly or quarterly installments. 

Why Are Corporate Tax Installments Important? 

Imagine paying a tax bill of $25,000 or $50,000 in just one month. Everyone would start detesting April month. It is also inefficient for the CRA, as most of its tax revenue will come in one month instead of throughout the year. 

Hence, the CRA has spread out the tax payments throughout the year. You start paying corporate tax installments for the 2024 financial year this year itself. 

Self-employed individuals pay advance tax every quarter, employers deduct income tax every month from the salary, and many transactions require the payee to withhold tax and pay it to the CRA. Similarly, companies pay corporate tax instalments at the end of the month. However, Canadian-controlled private corporations (CCPC) benefit from paying quarterly tax installments. 

The installment system also helps companies plan their cash flows and budget according to after-tax earnings and avoid interest on late payments. 

When Should Businesses Pay Corporate Tax Installments? 

While every small business has to file taxes, not every business has to pay corporate tax in installments. The CRA has some exemptions:

• If it is your first year of operation, you need not pay tax in instalments. But you must file and pay tax in April. The tax instalments begin from the second year of business operations, as the CRA uses your first year as the basis for calculating the instalment amount. 
• If your previous year’s and current year’s tax bills exceed $3,000, you need not pay tax in installments. You can make the full tax payment in April without facing any late payment interest. 

How Does the CRA Calculate Tax instalments?

If you are eligible for corporate tax installments, the CRA will request tax installments with the amount mentioned. It calculates the amount based on your previous corporate tax bill. If your previous tax bill was $8,000, and you are eligible for a quarterly payment, you will receive a request for $2,000 in tax installment, irrespective of your business earnings this year. You can pay the requested amount and avoid interest on late payments. 

Now, business has its ups and downs. No two years are the same, and the CRA understands it. If your earnings are higher than last year and your tax bill is $10,000 instead of $8,000, you can pay the additional tax of $2,000 in April, and the CRA won’t charge any interest on this additional tax. And if your earnings are lower, reducing your tax bill to $5,000, the CRA will refund the $3,000 additional tax ($8,000-$3,000) you paid in installments. 

The last date to pay the corporate tax installment is the end of the month/quarter, depending on your financial year. If your financial year is from January 1 to December 31, 2024, your first monthly instalment is due on January 31, 2024, or quarterly installment on March 31, 2024. 

This is the deadline, but you can pay your tax installment whenever cash is available.  

What Happens If You Don’t Pay Corporate Tax Installments? 

If the CRA has requested a $2,000 quarterly corporate tax installment and you don’t pay it, you may be charged interest from the due date. The due date is subjective. If you had a weak year and your overall tax bill is $5,000. Based on the actual tax liability, you should have paid $1,250 in quarterly payments instead of $2,000. 

As you didn’t pay any installments, you will be charged interest on $1,250 from April 1 onwards for the first installment, July 1 onwards for the second, October 1 onwards for the third, and January 1 for the fourth. But if you paid $1,250 every quarter, even when the CRA requested $2,000, you would face no interest as you paid the due tax. 

You must pay the actual tax owed or the CRA’s requested installment amount, whichever is lower. 

The corporate tax estimate can be closer to the actual if you maintain your books of accounts. This way, you can plan your business cash flow efficiently and don’t pay significantly higher or lower taxes. 

Contact Ford Keast LLP in South Western Ontario to Help You with Corporate Tax Installments 

A skilled accountant can maintain your financial records regularly and update you on the approximate corporate tax installment you should pay. Even if you miss paying the installment, you can pay it when you remember and stop the interest from adding up for every day of delay in tax payments. To learn how Ford Keast LLP in London can provide you with your accounting and cash flow planning, please reach out to us online or call us at 519-679-9330.