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Corporate Tax Instalments

August 2, 2012

Tax Question:

Why does my corporation have to pay instalments each month?

Facts:

A corporation has to pay monthly federal instalments if in the immediately preceding fiscal year, federal taxes payable exceeded $3,000, or if in the current year you estimate that federal taxes will be in excess of $3,000. Likewise, if provincial taxes in the immediately preceding year or current year are in excess of $3,000 provincial instalments will be required.

Discussion:

CRA does not have a crystal ball and so they cannot predict what your taxes are in advance of you submitting your tax return. Therefore, rather than waiting for you to tell them how much you owe, they assume that you will earn the same profit as last year and require you to make monthly instalments based on the prior year’s tax charge. (There are another two methods to calculating instalments, but they are a little more complicated than just basing it on last year’s return).

If you have paid the installments each month and you have made more profit than the previous year you generally have a further three months from the year-end to pay the remaining taxes. There are a couple of exceptions to this where this final installment has to be paid within two months of the year, such as if your profit in the previous year was in excess of $500,000. Failure to pay installments on time will mean that CRA will charge you interest at a prescribed rate, currently 5%, but the rate can change quarterly.

One of our many initiatives is to advise our clients when they have to pay installments, how much they have to pay and remind them when their three-month deadline is so that they can pay all installments on time and avoid interest.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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