Tax rules, thresholds and administrative procedures can change. Confirm current official requirements and obtain advice for material transactions or unusual facts.
An instalment notice is based on prior information
CRA may request instalments where prior-year net tax owing exceeded the applicable threshold. The reminder provides suggested amounts using historical information; it is not a final calculation of current-year tax.
Three methods
Taxpayers may generally use the no-calculation method shown by CRA, a prior-year option or a current-year option, subject to the rules. The safest method from an interest perspective may not be the lowest cash payment.
Example
A self-employed taxpayer received a reminder based on last year's $18,000 balance. This year, a major contract ended and projected tax is only $8,000. Paying the reminder amounts may create an overpayment, while using a current-year estimate may reduce cash outflow.
The estimate should include income tax, CPP/QPP, credits, withholding and instalments. If the current-year estimate is too low, instalment interest may apply.
Instalments are prepayments
Amounts paid reduce the final balance; they are not an additional tax. Keep confirmation numbers and reconcile them to the CRA account because payments can be misallocated between years or program accounts.
When income rises
A taxpayer who did not receive a reminder may still have a large filing balance if income rises. The absence of a notice does not guarantee that no future instalments or interest will arise.
Quarterly review
Update projected income after each quarter, compare tax already withheld and instalments paid, and adjust the reserve. Record the chosen instalment method and calculation.
This article provides general Canadian tax information and is not a substitute for tax, legal, financial or investment advice based on complete circumstances.