Cash Flow Crunch: Managing the September 15 Tax Instalment

The September 15 instalment deadline is looming. Many dread yet another payment to the CRA; after all, it seems like only yesterday that personal and business taxes due over the spring and summer were paid! Now is the time for tax and financial professionals to contact clients, estimate taxes owing for 2018, and navigate through taxing times if there is a cash flow crunch.

How can you help clients in this situation, and help them avoid being penalized by the tax man?

First, confirm what they owe and put a plan in place to remit the correct amount (as required by law), but no more. Knowledge Bureau’s Income Tax Estimator can help you double check that your client does, in fact, need to make an instalment payment on September 15. If their net tax owing the year prior, or an estimate for this year’s taxes due, is above $3,000 ($1,800 in Quebec), the September instalment payment is required.

Then their options are as follows:

• Pay the amount requested by CRA on the dates specified on the instalment notice
• Pay one-quarter of their prior-year balance in four equal instalments (due March 15, June 15, September 15, and December 15)
• Pay one-quarter of their estimated current-year tax liability in four equal instalments (due March 15, June 15, September 15, and December 15)

If the first option is chosen, no penalty or interest will be charged regardless of whether the instalments are insufficient. If either of the other two options is chosen, taxpayers are liable for a penalty for late or insufficient instalments if the amount paid is less than the liability determined when the return is filed.

If you help your clients manage tax withholdings, you may be able to help them reduce what’s owed. If they have employment income, or investment or rental income, two forms should be reviewed to ensure that tax withholding matches income tax payable. TD1: 2018 Personal Tax Credits Return is designed to match tax withholding by the employer with personal non-refundable credits.

To ensure withholding is not excessive, taxpayers must ensure that they claim for all of their personal tax credits when completing the form. Taxpayers with certain tax deductions (such as RRSP contributions, child care, spousal support, etc.) may further reduce withholding by completing and submitting T1213: Request to Reduce Tax Deductions at Source. Making plans to invest in the RRSP now, can therefore reduce two tax bills – the September 15 instalment as well as the April 30 final reconciliation of taxes owing on the T1.

Although the CRA’s prescribed interest rate for those unable to pay the CRA, or who have existing outstanding balances, is set to remain at 2 percent for the fourth quarter of 2018, take note that the rate charged on late or insufficient instalments is 4 percent higher than the prescribed rate (i.e. 6 percent).

If you have a balance due (over and above the amount of the instalments due) when you file your 2018 return and you’ve not made the instalments specified by CRA on the required payment dates, CRA will compute the interest you owe as follows:

1. Interest will be computed on the unpaid amount from the instalment due date to the payment due date (April 30 unless the return is a final return).
2. Interest will be credited on the instalments paid, from the earlier of the date paid and January 1, 2019.

If the above calculation results in $25 or more owing, you’ll be charged interest for the late or insufficient instalments. If that interest exceeds $1,000, you’ll also be charged a penalty.

If you’ve not got the ready cash to make your instalments in full and on time, here are some strategies to minimize your instalment interest:

• If you’ve got investments where the rate of return (after taxes) is less than the instalment interest rate (6 percent), you may find it prudent to liquidate the investments to pay the required instalments.
• Alternatively, if you can borrow the money at less than 6 percent, you may find it prudent to borrow funds to pay these instalments.
• If you must pay late, you can minimize your instalment interest by making the next instalment payment early or by making the next instalment larger than the amount required. This will increase your interest credit and, therefore, reduce the amount of instalment interest payable.

Additional educational resources:

If you’ve already got a foundation of tax education from Knowledge Bureau, and have completed a designation like the Distinguished Financial Advisor – Tax Services Specialist program, it’s time to take your skills to the next level! Earn CE credits, and prepare for the next tax season by attending the Fall or Winter CE Summits, where the focus will be on year-end planning for investors and small businesses, and an advanced 2019 personal income tax update.

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