2.10 What are instalment payments and how are they calculated for an individual?

Instalment payments represent ongoing tax payments to the government throughout the year.  They are usually required if an individual’s ‘net tax owing’ was greater than $3,000 (known as the ‘instalment threshold’) in either of the previous two taxation years.  Typically this would occur when regular tax withholding payments throughout the year were insufficient (See ITA 156.1(2) for further details).

If an individual is required to make instalments, the payments will be made quarterly on March 15th, June 15th, September 15th and December 15th.  As per ITA 156(1) Individuals (other than farmers and fishermen) can calculate their instalment payments using any of the following three methods:

1. Current year option: The quarterly installments are based on the individual’s current year estimated tax payable.
2. Prior year option: The quarterly installments are based on the individual’s tax payable for the previous year (i.e. you would base your 2019 installments on your tax payable in 2018)
3. No-calculation option: The first two quarterly instalments are based on the tax paid in the second preceding taxation year (2017 is the second preceding year for 2019) and last two instalment payments are based on the tax paid in the preceding taxation year. This calculation is explained in more detail below.

Why are there three options available?  Largely this has to do with the problems in guessing or estimating the instalment amounts using the current year or prior year methods.

1. Current year method: the problem with this method is that you are making installment payments based on an estimated amount, as you will not know your actual tax payable until the next year when you file your tax returns.

2. Prior year method: Installment payments are due on March 15th, June 15th, September 15th, and December 15th. So even with this method, you will most likely be making the first payment (March 15th) based on as estimated tax payable.
3. No-calculation method: CRA provides us with this method which does not require any estimates. First two payments are based on the tax payable from the 2nd preceding year, and the last two on the preceding year. This method is called the no-calculation method because the CRA calculates the installment payments for us

The individual can choose any of the available options according to his/her discretion.  Typically the taxpayer would choose the option with the least tax paid up front.

Under the ‘no-calculation’ method the instalments are determined as follows (for 2019):

1. An amount equivalent to 1/4 of the installment base of the second preceding taxation year (2017) is to be paid on March 15, 2019 and June 15, 2019.
2. For the installments to be paid on September 15, 2019 and December 15, 2019, the amounts already paid under (a) are deducted from the total tax paid in the preceding taxation year (2018). The resulting amount is then spread over the last two installments.

References and Resources

• Income Tax Act, RSC 1985, c1, (5th Supp.) s 156(1)
• Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.4.1