Most employed Canadians have taxes withheld from every paycheque through payroll deductions. But self-employed individuals, retirees, investors, and others with income not subject to withholding must pay their taxes throughout the year through quarterly tax installment payments. Here is who needs to pay and how the system works.
You are required to pay tax installments in Canada if your net tax owing (federal taxes plus provincial taxes minus credits and withholdings) exceeds $3,000 in the current year AND exceeded $3,000 in either of the two previous years. The $3,000 threshold applies per province; Quebec uses a lower threshold of $1,800.
Common situations that create installment obligations include:
If you are required to pay installments, the CRA sends you installment reminders in February and August. These reminders include suggested payment amounts and the upcoming due dates. The reminders are not bills — they are suggestions based on your prior year's tax situation. You are not legally obligated to pay the suggested amounts, but paying amounts that result in owing less than $3,000 at year-end avoids installment interest.
Pay the same amount you owed the previous year, divided into four equal quarterly payments. If you owed $8,000 last year, pay $2,000 per quarter. This method is simple but may lead to under- or over-payment if your income changes significantly.
Use your tax owing from two years ago for your first two payments, and adjust the last two payments based on last year's actual owing. The CRA's reminders typically show this calculation. If your income has been consistent, this is a reliable method.
Estimate what you will owe for the current year and pay one-quarter each quarter. This is the most accurate method if your income changes significantly but requires good bookkeeping and income estimation. If you underestimate and end up owing more than $3,000 at year-end, you pay installment interest on the shortfall.
If your installments are insufficient, the CRA charges installment interest at the prescribed rate, which is currently 10% annually, calculated daily on the shortfall. The calculation is complex but roughly speaking, if you were short $2,000 per quarter across the year, you might owe $400 to $600 in installment interest.
There is also an installment penalty that applies if your installment interest exceeds $1,000. The penalty is 50% of the excess over the greater of $1,000 or 25% of the interest that would have been payable if no installments had been made. This penalty can add meaningfully to your tax bill if you consistently underpay significantly.
You can pay tax installments through:
Always include your SIN and indicate the payment is for installments to ensure it is applied correctly.
If you overpay your installments, the CRA applies the excess against your balance owing at year-end. If you still have a balance, it becomes a refund. Overpaying does not earn interest, but it does avoid installment interest. Many self-employed individuals prefer to overpay slightly rather than risk the penalty.
If you receive pension income or receive your salary from an employer, you can request additional withholding to avoid installment obligations. Complete a new TD1 form requesting extra withholding, or contact your pension plan administrator. Increasing withholding eliminates the need to track and make quarterly installment payments manually.
In your first year of self-employment, you generally do not need to make installments because your net tax owing in prior years was zero. However, be aware that you will owe a potentially large amount when you file your first self-employed return. Set aside 25 to 30% of your net self-employment income throughout the year so you are not surprised by the tax bill in April.
Keep your installment funds in a fee-free account until payment day. KOHO has no monthly charges. Use code 45ET55JSYA for a bonus when you sign up.
Open KOHO Free — No Fees — Code 45ET55JSYA