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Tax Centre

Manage Quarterly Instalments and Maximize Investment Opportunity

by Evelyn Jacks

Several years ago an elderly gentleman came to me with a simple question: “Is there anything
I can do to reduce my quarterly instalment payments to the tax department?”

In his hand was a billing notice from the Canada Revenue Agency (CRA) with a stunning number on it: $80,000, the amount of his next instalment payment. It turns out that this pensioner had sold shares in his small business the previous year, recording a large one-time capital gain. However, the CRA assumed his income would be the same the following year and was billing him accordingly.

Indeed, the gentleman had already made one $80,000 payment to the CRA, effectively giving the government an interest-free loan of money that he could have been investing. He didn’t know that he had the ability to reduce his instalments to reflect his current income situation. All it took was some paperwork to straighten out this situation.

If you are concerned about the size of your instalment payments, or think you might be overpaying, there are three things you need to know to maximize your rights to pay only the correct amount of tax throughout the year:

Step 1: Understand the Instalment Options.

CRA will have automatically generated a bill for quarterly instalment payments (called the “no calc option”) if you owed more than $2000 in the current tax year (2003) and in either of the two preceding tax years (2002 or 2001) when you filed your 2003 tax return.

In the first year you fall into the instalment payment profile, you will get only one notice in August and it will ask for 50% of the taxes you owed on last year’s income to be paid on each of September 15 and December 15. Ouch!

In subsequent years, you will receive two reminders: one in February, reminding you of your remittance requirements on March 15 and June 15; and one more in August, to tee up for the September 15 and December 15 payments. (Farmers may make only one instalment payment, on December 31.)

CRA’s billing notice serves as an important reminder for you to pay tax or visit your financial advisor or tax expert. You should ask for a calculation of an up-to-date projection of the taxes you will owe for the current year. You can then do a little tax and investment planning to reduce those instalments owing before year end by choosing one of the two other options for meeting your obligations: 1) the prior year option; or 2) the current year option.

Under the prior year option, your instalment payments are based on last year’s income source and level. In notifying CRA to adjust its records, you are indicating that you are expecting a level of income similar to last year’s, but one that also decreased over what was reported in the previous two years. Your new quarterly instalments are then based on the 2003 taxes. On each instalment due date, one-quarter of last year’s tax and Canada Pension Plan liability is remitted. (In the first year you fall into the profile, remember, you will need to remit one-half of your taxes on September 15 and one-half on December 15.)

CRA will not charge any interest under this option even if it turns out you’re short on your instalments when you actually file your 2004 tax return next spring. You will, however, be charged instalment interest if the instalments are late or less than what they should be under the prior year option. Those interest payments are charged at the prescribed rate of interest and compound daily, so you’ll want to avoid them. Prepaying your next instalment or overpaying it can offset interest charges.

Under the current year option, you can estimate the actual income you expect to report this year, as well as your net taxes owing for 2004, and add to this any Canada Pension Plan contributions you may have to make. However, this time, even if you pay your instalments on time and in full based on this calculation method, CRA will charge you interest if you owe more when you actually file your 2004 tax return.

It is important to keep a copy of your cancelled cheques or other notices of payment in a safe place, as it can happen that CRA credits your account for the wrong taxation year or otherwise incorrectly records your payment.

A summary of your instalments will then be sent in February 2005. This is an important document that is the source of the instalment tax credit that offsets taxes owing on your 2004 tax return, so keep it with your tax documents.

To help you compute your instalment payments under the current or prior year methods, CRA provides a chart in its publication P110 Paying Your Income Taxes by Instalment (see sample below). However, it will likely pay to ask your advisor for help with this, as there may be more you can do by year-end to minimize your taxable income.

Step 2: Concept and Action.

There can be many reasons you may find yourself in an instalment payment profile now or when you file your return next spring. Perhaps you don’t have enough taxes withheld at source, as is the case with many pensioners, investors, new alimony recipients, and rental property and unincorporated small business owners. Or you may become aware of an unusual receipt of income between now and the end of 2004, as was the case with the elderly gentleman who sold his business.

In other cases, the increase can come from unexpected bonuses from employment or investment income, a lump-sum withdrawal of RRSP or RRIF amounts, or even having several jobs during the year.

You can minimize your exposure to the instalment tax profile by focusing now on reducing taxes owing at April 30, 2005. Ask your advisor about specific strategies for your income and family filing profile and these questions in particular:

  1. What is my estimated taxable income for the year and estimated federal and provincial taxes payable?
  2. Have I remitted enough tax at source or through instalments?
  3. If not, do I have any additional RRSP contribution room to offset unusual income? (If so, plan to make the contribution before March 1, 2005.)
  4. Should I consider the addition of Labour- Sponsored Venture Capital Tax Credits for additional tax offsets?
  5. Should we be considering year-end tax loss selling to offset capital gains?
  6. Do I have any capital loss carry forward balances to use against capital gains?
  7. Can we control the timing of investment income?
  8. Is there an opportunity for income splitting with a spouse?
  9. Should new medical expenses such as dental work or new glasses, or political or charitable donations, be initiated before December 31?
  10. In the case of a commissioned salesperson or a proprietor, can net income be reduced by generating operating expenditures and/ or capital acquisitions before year-end?

Step 3: Invest, Save Tax Dollars and Create Wealth.

Any time is a good time to review your instalment payment profile, but the second half of the tax year is prime time – before the September 15 and December 15 payments. Never overpay your quarterly tax instalments. Use planning to stay out of the instalment profile if possible. If not, pay only the correct amount – not one dime more – and invest the difference.

Calculation Chart for Estimation of 2004 Instalment Tax Payments

Source: P110 Paying Your Income Taxes by Instalment from CRA website.
Note: The line references are from the General Return or Notice of Assessment or Notice of Reassessment.
Net federal tax (line 420) $ _____ 1
Old Age Security (OAS) repayment (from line 422) + _____ 2
Provincial or territorial tax (line 428) + _____ 3
First Nations tax (line 432) + _____ 4
Total payable (add lines 1 to 4) = _____ 5
Total income tax deducted (line 437)
(Quebec residents use line 439) _____ 6
Refundable abatements (line 440 plus line 441) + _____ 7
Refundable medical expense supplement (line 452) + _____ 8
Refund of investment tax credit (line 454) + _____ 9
Part XII.2 trust tax credit (line 456) + _____ 10
Provincial or territorial tax credits (line 479) + _____ 11
Total credits (add lines 6 to 11) + _____ 12
Net tax owing (line 5 minus line 12) = _____ 13
CPP contributions payable (line 421) + _____ 14
Total instalment amount due (lines 13 plus line 14) = $_____ 15

Evelyn Jacks is the author of 30 best-selling books on the subject of personal income taxation, and the President of Knowledge Bureau, Inc., Canada’s leading professional education publisher in the tax and financial services industry, specializing in delivering courseware and information services to knowledge-based practices. For more information call toll free 1-866-953-4769 or visit www.knowledgebureau.com.

This article is written to be of a general nature and neither the author, her company, employees, subcontractors or others associated with The Knowledge Bureau can take responsibility for any results, positive or negative, taken by any persons. While the author received a fee to write this article, she is not in the business of providing advice on investment products and is not registered and licensed to do so, nor does the author have any compensatory relationship, or beneficial ownership regarding the sale of investment products discussed herein


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