Corporate Tax Instalments: When Your Corporation Pays Monthly or Quarterly
- Targeted Accounting
- Business
Table of Contents
Why the CRA Wants Your Tax Before the Year Is Over
In your first profitable year, corporate tax is a single bill that arrives after year-end. From the second year on, the CRA expects to be paid as you go. If your corporation’s tax bill is large enough, you must make instalments during the year, and if you do not, interest and potentially a penalty are added automatically when the return is assessed.
Instalments are the part of corporate tax most often mishandled by growing businesses, not because the rules are complex but because nobody tells you they have started. This article covers who must pay, how often, how much, and what happens when you miss one. It sits alongside our founder’s guide to T2 corporate tax.
Who Has to Pay Corporate Tax Instalments
The trigger is simple. If your corporation’s total federal and provincial tax payable was more than $3,000 either this year or last year, you are expected to pay instalments this year. Below that, you pay the whole balance at the balance-due date and nothing during the year.
A corporation in its first fiscal year has no previous year to base instalments on and is not required to pay them; the first bill is the balance after year-end. The obligation begins in year two, based on the year-one assessment. That is the point where most founders are surprised, because the first instalment can be due within months of paying the first year’s balance.
Quarterly or Monthly Instalments
The default is monthly. A Canadian-controlled private corporation can pay quarterly instead if, for the current or previous year, it claimed the small business deduction, had taxable income of $500,000 or less together with any associated corporations, had taxable capital of $10 million or less, and has a perfect compliance history: every return filed and every payment made on time over the previous twelve months.
That last condition is the one small businesses lose. One late GST/HST return or one late payroll remittance in the past year and the corporation drops to monthly instalments for the following year. The money is the same; the number of payments is not, and each one is a chance to forget.
Quarterly instalments are due on the last day of each quarter of your fiscal year. Monthly instalments are due on the last day of each month. A 31 December year-end therefore has quarterly payments due 31 March, 30 June, 30 September and 31 December.
How Much to Pay: The Three Calculation Methods
The CRA gives you three ways to calculate the instalment and lets you choose the one that produces the lowest payments:
- Current-year estimate. Estimate this year’s tax and divide it evenly. Lowest if profit is falling; risky if you underestimate, because interest is charged on the shortfall.
- Previous-year method. Take last year’s tax and divide it evenly. The safe choice when profit is stable or rising: the CRA cannot charge instalment interest if you pay this amount on time, even if the current year turns out higher.
- Two-year method. Base the first payments on the year before last, then true up using last year’s tax for the remaining payments. Useful when last year’s return is not yet filed when the first instalment is due.
The CRA sends instalment reminders showing the amounts under the previous-year method. They are reminders, not assessments; you can pay less if a current-year estimate justifies it, but you carry the interest risk.
A corporation whose tax was $12,000 last year and expects a similar year pays $3,000 a quarter. One that expects tax to fall to $6,000 can pay $1,500 a quarter, and pays interest only if the actual bill ends up higher than the instalments covered.
Instalment Interest and Penalties
If instalments are late or short, the CRA calculates instalment interest at its prescribed rate, currently in the high single digits, compounded daily from each due date to the balance-due date. It is calculated on the difference between what you paid and what you should have paid under the method that produces the lowest interest, so paying something is always better than paying nothing.
If instalment interest for the year exceeds $1,000, a penalty is added: 50% of the amount by which the interest exceeds the greater of $1,000 or a quarter of the interest that would have applied had you paid nothing. In plain terms, small shortfalls cost interest; large or total failures cost interest plus a penalty.
Interest paid to the CRA is not deductible. The corporation is effectively paying an after-tax loan rate well above what a bank would charge, which is why funding instalments from an operating line is usually cheaper than skipping them.
How to Pay and How to Plan
Pay through your bank’s business tax payment service by choosing the corporate tax instalment option, through the CRA’s My Business Account by pre-authorised debit, or by the online payment portal. Always quote the corporation’s business number with the RC0001 program account. Payments applied to the wrong account, most often the GST/HST account, are a recurring cause of “unpaid” instalments that were in fact paid.
The planning side is a habit. Set aside a percentage of monthly profit, typically 12% to 15% for a small Ontario CCPC, in a separate account, and pay the instalment from it on the last day of the quarter. Put the four dates in the same calendar as your GST/HST and payroll deadlines; our business tax calendar has them laid out. When the year-end balance arrives, the remainder is small and expected instead of large and alarming.
Finally, remember that instalments do not change the balance-due date. Whatever is left after your instalments is still due two months after year-end, or three for an eligible small CCPC, well before the T2 itself is filed.
Not Sure Whether You Owe Instalments This Year?
We check your assessment, work out the lowest compliant instalment schedule, and set up the payments so they happen on the right dates from the right account. It is a fifteen-minute fix for a problem that otherwise costs interest every year.
