Why pay corporate tax instalments in Canada?

Tax instalments are payments that corporations are required to make throughout the year to cover their required tax obligations. However, they are often underestimated. Failure to pay tax by instalments on time can result in penalties and interest, which can quickly affect your tax bill and cash flow. Whether you're a small business or a large corporate entity, understanding your obligations is essential to avoiding costly mistakes and maintaining effective financial management.

In this article, we discuss what tax instalment payments are, who must pay instalments, how they are calculated, deadlines, and best practices for managing them effectively.

What are tax instalments?

An installment is a partial payment made throughout the tax year to cover the tax you owe on your business's income. Unlike a lump sum payment at the end of the tax year, these payments spread out your tax amount, reducing the risk of late payment penalties or interest.

This system not only simplifies your company's payment schedule, but also allows the Canada Revenue Agency (CRA) and Revenu Québec to collect taxes on a regular basis. By making installment payments to the CRA on time, businesses can maintain financial stability while avoiding penalties or interest for late payments.

Tax installment payments are used in a variety of contexts, such as sales taxes (GST and QST) or certain income that is not subject to withholding, such as investment income or rental income.

Who must pay tax instalments in Canada?

Not all businesses are automatically required to pay instalments. Specific criteria determine whether your company may be required to make these payments at the federal level or in provinces such as Quebec.

1. General criteria: $3,000 threshold

Your corporation must make instalment payments if the tax payable for the current year or the previous year exceeds $3,000. This threshold applies to federal taxes (Parts I, VI, VI.1, and XIII.1) and provincial or territorial taxes, after adjustments but before refundable tax credits.

Exceptions:

• If your total tax payable is $3,000 or less, you are not required to pay instalments, but the full balance must be settled by the due date.
• Instalments are not required for a short pay period (less than one month) or for small Canadian-controlled private corporations (CCPCs) with a tax year shorter than one quarter.

Practical example: If your corporation paid $4,500 in tax in 2024 and expects a similar amount in the current year, it is required to pay instalments to avoid interest.

2. Newly incorporated companies

Newly incorporated companies benefit from a deferral of installment payments. They are not required to make installment payments until their second year of operation. However, any outstanding annual tax for the first year must be paid in full by the balance due date.

Important exceptions:

• This exemption does not apply to certain types of special taxes, such as Part XII.1 tax (on mining and petroleum income).
• Your first instalment for the second year may be required even before you've filed your first tax return or paid the balance for the previous year.

Practical tip: If you plan on earning a lot of income from the start, it's a good idea to anticipate your tax obligations by making a realistic estimate of your income and tax liability. This will allow you to spread out your payments and avoid a large bill at the end of your first tax year.

3. Shortened tax year

In certain special cases, your company may be exempt from making installment payments. This is especially the case if your tax year is considered shortened.

For example:

• If your fiscal year is less than one month, no installment is required.
• For an eligible small Canadian-controlled private corporation (CCPC), this exemption also applies if the tax year is less than a quarter.

How do you calculate your tax instalments?

To determine the amount of these advance payments, you must first calculate your company's net tax liability, which includes several tax components, including:

• Part I: Corporate income tax.
• Part VI: Tax on Financial Institutions.
• Part VI.1: Tax on Corporations Paying Dividends on Taxable Preferred Stock.
• Part XIII.1: Additional Tax on Authorized Foreign Banks.

Once you have determined these amounts, you can use one of three methods to calculate your installments.

The three methods of calculating your tax installments

There are three main methods for determining the amount of your payments:

1. Current-Year Option: Based on the current year's estimated tax amount. For example, if your estimated tax for 2024 is $12,000, you'll make four quarterly payments of $3,000.
2. Prior-Year Option: Based on the tax paid in the previous year. Example: A corporation that paid $10,000 last year will make the same payments this year.
3. Alternative Method (ARC): Based on actual receipts through each due date, suitable for businesses with fluctuating receipts. For example, if your first quarter's income generates $2,000 of tax, that amount is paid on the first due date. Subsequent payments are adjusted based on accumulated income.

Useful resources for your calculations

• Calculating Quebec corporate tax installments: details on calculation mechanisms and exemptions.
• Form CO-1027 to calculate Quebec tax installments.
• Instalment calculator (CRA) accessible through your online profile on the CRA website.
• Worksheet 3 - Form T2WS3 to calculate quarterly installments with ARC.
• Worksheet 2 - Form T2WS2 to calculate monthly installments with the CRA.

How to pay your tax instalments in Canada

Paying your instalments correctly and on time is essential to avoid penalties and interest that can strain your company's cash flow. Payment terms vary depending on whether you pay your taxes federally to the CRA or provincially to Revenu Québec.

Federal payments (CRA)

The CRA offers several convenient ways to pay your tax obligations:

• My Business Account: Log in to your online account on the CRA website to make a direct payment.
• Online Banking: Most Canadian financial institutions allow you to make a payment directly through their online platforms by selecting "Canada Revenue Agency - Business Payments".
• Telepayment: This service is available for those who prefer to make payments over the phone through their bank.
• Cheque or Money Order: Send a payment by mail with a printed voucher from your online account.

Payments made online or through a bank are fast, secure and guaranteed to be processed quickly.

Quebec provincial payments (Revenu Québec)

For businesses located in Quebec, Revenu Québec offers several accounting options:

• My Account for Businesses: log on to the Revenu Québec portal to make a secure online payment.
• Online Banking services: use your banking platform to make a payment to Revenu Québec. Be sure to select the "Instalment payment" option.
• Payment by mail: send a check or money order to Revenu Québec. Don't forget to include your company's reference number.
• Service points: some financial institutions accept payments in person.

Ensure your instalments match the required amounts to avoid adjustments or delays.

Deadline for tax installment payments

Unlike corporate tax returns, which must be filed at a specific time, as explained in our article on Quebec corporate tax deadlines, installment payments must be made on specific dates throughout the year. These deadlines, set by the Canada Revenue Agency (CRA) and Revenu Québec, vary depending on whether your company is a quarterly or monthly taxpayer.

To ensure that you meet these deadlines:

• Set up reminders in your accounting software or calendar.
• Opt for online payments to avoid delays in the mail.

By respecting deadlines, you'll not only save yourself unnecessary costs, but also strengthen your company's financial health by ensuring a predictable cash flow.

1. Quarterly payments

For small businesses that qualify for quarterly payments, installments are due on the following federal and state dates:

• March 31st
• June 30th
• September 30th
• December 31st

These dates correspond to the end of each tax quarter, allowing businesses to better manage their tax obligations.

Practical example: if your company has a total tax liability of $12,000 for the current year, you'll need to pay $3,000 on each of these dates. If you're late, interest begins to accrue the day after the due date.

2. Monthly payments

Large corporations whose taxable income exceeds $1 million are required to make monthly installment payments. These monthly payments must be made by the last day of each month.

Example: a corporation with a total tax of $120,000 for the year must pay $10,000 each month, for example, on January 31, February 28, and so on.

3. Special features of tax payments in Quebec

For Quebec-based companies, the quarterly and monthly payment deadlines are generally aligned with those of the CRA. However, it's always best to check your specific obligations via My Account for Businesses on the Revenu Québec website to avoid any misunderstandings.

Interest and penalties

Failing to pay the tax you owe by the due date will result in interest and potentially additional penalties. Interest is calculated daily on any unpaid tax amount, and penalties are applied for significant or repeated failures.

These financial consequences are similar to those for late tax returns, as we explain in our article on late taxes for businesses.

Interest on tax instalments

Late payment interest is charged daily on the unpaid amount, starting the day after the due date. These rates, often around 6% or more, are revised quarterly by the Canada Revenue Agency (CRA) and Revenu Québec, which can make charges even more unpredictable in the event of extended delays.

Practical example: If a $5,000 payment is two months late and the annual interest rate is 6%, you could owe about $50 in additional interest.

Penalties on tax instalments

In addition to interest, other penalties may be imposed if the non-payment is considered significant or repeated. These penalties are often requested:

• Incomplete payments.
• Total non-payment despite clear obligations.

Make tax payments in installments: Our tips

1. Organize your payments: Set up reminders or use accounting software to make sure you never miss a payment.
2. Opt for online payments: This method reduces the risk of delays due to postal or processing errors.
3. Consult a professional: consult an accountant or tax specialist to clarify your obligations and choose the most appropriate calculation method.

T2inc.ca helps you with your corporate taxes in Canada

Managing installments is an essential part of corporate taxation. Meeting your obligations can help you avoid costly penalties and ensure stable cash flow for your business.

At T2inc.ca, we understand the tax challenges faced by business owners. Whether it's corporate income tax, Quebec CO-17 returns, or any other tax case, our team is here to help. Contact us today to optimize your tax obligations and simplify your processes.