Minimizing Instalment Payments

The second quarterly instalment for 2014 will be due on June 15. It’s important to minimize that payment and keep your clients’ money invested.

Here’s what to look for:

You will be required to make instalments if you owed $3,000 or more when you filed your 2013 return and also when you filed for 2012 and/or 2011. The amount you have to pay depends on what method you use to calculate the instalments. The safe bet is to pay what CRA tells you, but that’s not always the best method.

Clearly the lowest instalment amount is zero. To accomplish this, you need to make arrangements for income tax to be withheld at source so that your balance due will be less than $3,000. For employees and pensioners, this is a simple matter of requesting that the payor withhold more tax than they are currently withholding. If you can keep your balance due below $3,000 each year, you’ll never have to make instalment payments again.

CRA’s instalment notices will have used the prior-year method and calculated your March and June 2014 payment as 25% of the balance due on your 2012 tax return. Your September and December instalments will each be one-half of your 2013 balance due less the March and June instalments. If your 2014 taxes will be more than your 2013 taxes, then you should make the payments requested by CRA – there will be no instalment interest, even if these payments are insufficient. 

If your 2014 taxes will be lower, then the current-year method will be better. Using this method, you would pay 25% of your estimated 2014 taxes each quarter.

If it’s too early to predict your 2014 income, then make the payments suggested by CRA and adjust if and when it becomes clear that your 2014 income will be lower than in 2013.

Example:

Hank’s is retired. He earns investment income as well as CPP, OAS and RRIF income. His balance due for 2012 was $3,600 and for 2013 was $3,200. Hank estimates that his balance due for 2014 will be about $3,400.

Option 1: Prior-year option (using CRA’s Notices). Hank’s instalments will be $900, $900, $700, $700.

Option 2: Hank requests that an additional $40 per month be withheld from his OAS payments starting in February so that his balance due for 2014 will be $2,960. He then uses the current-year option for 2014. Because his balance due is below $3,000 he will not have to make instalments for 2015. He can adjust his withholding in future years, if necessary, to keep his balance due below the instalment threshold. With an estimated balance due of $2,960 for 2014, Hank’s instalment payments for 2014 will be $740 each.