How To Avoid Tax Instalment Interest

Over the past couple of months, the most frequently asked questions were: What is instalment interest and how can I avoid it?

If you would like to learn more about calculating and paying tax installments you can do so by visiting one of our previous blog posts that details this topic.  In this post, we will delve deeper into instalment interest and how to avoid this charge. 

Instalment interest is a super grey area with the CRA because not all individuals are sent instalment reminders, but may still be charged instalment interest. If you want to avoid interest, pay your instalments before the end of the calendar year (or your period end).

What is instalment interest?

CRA charges you interest on any taxes/GST that were not paid before the end of the calendar year, or the end of the period. Even if you pay on time in full on the due date of your annual filing.

How do I know if I should pay instalments?

If your prior year’s amount owing for either GST or personal/corporate tax was higher than $3000, you are required to pay instalments for the current year.

If I don’t receive an instalment notice or reminder, do I still need to pay them? YES if you want to avoid instalment interest.

How do I calculate my instalments?

If you are a quarterly bookkeeping client at Homeroom, we send you the suggested instalments in our quarterly bookkeeping email based on your income and GST collected for the current year.

If you are not a quarterly bookkeeping client at Homeroom, you should pay the same balance as you had for personal/corporate tax and GST in the prior year/period.

What if my situation in the current year is drastically different from last year?

The point of instalments is for CRA to get the majority of your annual tax/GST before the end of the period. The CRA doesn’t know what is currently going on for you, so make the payments based on your current situation, which could be more or less than your balance last year.

IMPORTANT:  Instalment interest is compounded daily at the prescribed interest rate, which can change every three months, according to the CRA website.

Receiving an instalment reminder:

The CRA sends instalment reminders to people who will likely have to pay tax instalments. The reminders suggest the amount to pay and list the calculation options.

There are two instalment reminders (form INNS1) sent:

  • February reminder is for the March and June payments
  • August reminder is for the September and December payments
  • If you received an August reminder only, see this.

You can view your instalment reminders online using My Account.

If you received an instalment reminder in 2023, but your 2023 net tax owing is $3,000 or less ($1,800 or less for Quebec), you do not have to pay tax instalments for 2023.

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