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TAXFlash News from IncomeTaxCanada.net
:: Income tax installment plans triggered by CCRA installment reminder notices
:: At this time of year I attend to numerous phone calls from taxpayers enquiring about the need to pay personal income tax instalments. The trigger for these calls is CCRA’s instalment reminder notices for payments due on the 15th of September and December. Paying personal income tax instalments isn’t an issue for the majority of taxpayers. For these people, sufficient income tax is withheld from employment and other income eliminating the need to remit additional tax throughout the year. Where this is not the case, taxpayers need to concern themselves with paying quarterly income tax instalments – a potentially tricky exercise that can become costly if not properly managed. In 2002, taxpayers are required to make quarterly income tax instalments if, during either 2000 or 2001, their net tax owing (including CPP on self-employed earnings) is more than $2,000. In February and August of each year these taxpayers will receive a form suggesting that instalments be made and stating the amount CCRA would like them to pay. The February instalment reminder will show the instalment amounts due on March 15 and June 15 with the August instalment reminder showing the September and December 15 amounts due. The first two instalment payments are based on tax information taken from your tax return for the second preceding year (e.g., for 2002 this will be your 2000 tax return) whereas the last two payments are calculated using your tax return for the first preceding year (e.g., for 2002 this means your 2001 tax return). It is this shift in the calculation base for the last two quarterly instalments that often causes taxpayers consternation. In some cases taxpayers will experience a significant shift in their income between the two years that are used as a base for the instalment calculation. This can happen, for example, where a taxpayer has a large non-recurring capital gain in one of the two years. If such an income spike occurred in 2001, these taxpayers will find CCRA requesting instalments for September and December that are considerably higher than the previous two quarters. In these situations taxpayers are often left wondering what to do. For those taxpayers who take comfort in doing everything according to the book, the answer is simple – pay whatever tax instalments CCRA suggests and be done with it. This approach is the only way taxpayers can achieve certainty that interest and, possibly, penalties won’t be assessed for late or deficient instalments. Many taxpayers follow this course and that’s just fine if it helps them sleep at night. One big problem I have with this approach is the risk that taxpayers may be providing CCRA with an interest free loan if they overpay by blindly following CCRA’s recommended instalment schedule. This issue begins to grate when you consider what happens if the tables turn and the taxpayer has underpaid instalments during the year – tick, tock goes the interest clock. In today’s low-interest environment overpaying tax instalments isn’t likely to be a costly experience but, for many, it’s the principle that matters. If you’re the type that falls into the not-a-penny-too-soon category you’ll need to do a little homework if you want to avoid racking up interest charges for deficient instalments. Taxpayers wishing to reduce the instalments they need to pay for the remaining two quarters of the year will need to estimate their taxable income and the income tax (and CPP) they expect to pay in 2002. Calculating your current year tax position is not an easy thing to do given the ever-changing nature of investment returns and fluctuating self-employment earnings to name a few of the factors that come into play. A prior year tax return provides a good starting point. Using this return as a road map, taxpayers can rework the numbers getting rid of numbers that won’t recur in 2002 (e.g., large, one-time capital gains) and estimating those that will recur (e.g., interest). If you’re self-employed don’t forget to include your obligation to pay both the employer and employee portion of CPP. For 2002 this CPP total could go as high as $3,346.40 ($1,673.20 x 2) up $353.60 from 2001. Remember too, that as a self-employed individual you’re entitled to a deduction from taxable income equal to one-half of your CPP obligation. Recalculate your income tax including CPP on this basis then deduct the quarterly instalments that were paid on March 15 and June 15. Divide this difference in two to arrive at an estimate of the instalments to be paid on September 15 and December 15. If you’re income in 2002 is estimated to be lower than your income in 2001, you should end up with a lower instalment requirement for the rest of the year than the amount CCRA has indicated they’d like you to pay. As a point of interest, this year September 15 falls on a Sunday so you actually have until Monday to make your third-quarter instalment without being considered late. If, after following this method to reduce your remaining tax instalments, CCRA still owes you a refund, don’t expect to receive any interest on your overpayment. In the interim, at least you retained more of your money for your use and enjoyment than would have been the case had you followed CCRA’s calculation. Should you err in your calculations and find that you owe additional income tax at the end of the day CCRA will charge up the instalment interest meter and send you a bill. Currently, the interest meter is set a 7 per cent and remember, because such interest is not tax deductible, it’s payable with those more expensive after-tax dollars. So taxpayers wishing to reduce their final quarterly instalments are free to do so, however, they should be sure to keep a sharp pencil if they want to avoid interest charges.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney