16 May 2008 External T.I. 2007-0259081E5 - Paying Income Tax by Instalments

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. The meaning of "the first time" as is used in E2000-0004525.

2. The rules for paying quarterly instalment amounts.

Position: 1. The first time as is used in E2000-0004525 refers to the second preceding year where the net tax owing exceeded the threshold.

2. Individuals may have to remit pay taxes by way of quarterly instalments if their net tax owing exceeds a certain threshold. For 2008, the threshold everywhere but in Quebec is $3,000. In Quebec, it is $1,500.

Reasons: Sections 156 and 156.1 of the Income Tax Act.

XXXXXXXXXX

May 16, 2008

Dear XXXXXXXXXX :

Re: Paying Income Tax By Instalments

This is in reply to your email concerning the above-referenced. Your email contains two requests: your first request seeks the clarification as to the meaning of "the first time", as used in document E2000-0004525, while your second request seeks answers concerning the rules for paying quarterly instalment payments.

Individual taxpayers must file their tax return for a particular year on or by April 30th of the following year. However, for self-earners and others who may need more time to determine their income for that year, an extension of that deadline exists. In this respect, subparagraph 150(1)(d)(ii) of the Income Tax Act ("the Act") extends the due date for filing to June 15th of the calendar year following the particular taxation year to a self-earner, a co-habitating spouse, or a common-law partner who carried on business during the year. But while the return does not have to be filed until June 15th, payment of all taxes owing is required by April 30th, failing which, interest will be assessed at the prescribed rate until such time as the amount is paid.

As well, individual taxpayers may have to pay quarterly instalments payments before filing their annual tax return, if the net tax owing exceeds a certain threshold. For the taxation year 2008, in jurisdictions other than Quebec, the threshold is $3,000, and consists of federal and provincial tax. In Quebec, the threshold comprises federal tax only, and is $1,500.

In document E2000-0004525, sections156 and 156.1 of the Act were cited as authorities requiring an individual taxpayer to remit income tax by instalments, where the individual's net tax owing for the current year, and either of the two preceding taxation years exceeds the threshold. The individual must make those payments on or by March 15th, June 15th, September 15th, and December 15th. Mention was also made in E2000-0004525 that instalment payments were not required where the preceding criteria were met for "the first time" in the current year. In this respect, "the first time" refers to the second preceding year where the net tax owing exceeded the threshold.

The Canada Revenue Agency ("CRA") helps individual taxpayers to determine whether they are required to pay income tax by instalments. To that end, it issues publication P110 (E), Paying Your Income Tax by Instalments, available on its website at www.cra-arc.gc.ca. In that document, you will find that there are three options for calculating instalment payments: the no-calculation option, the prior-year option, and the current-year option. The no-calculation option is based on a combination of the net tax owing for the second preceding year and the immediately preceding year. The prior-year option calculates instalments based on the actual net tax owing for the immediately preceding year. The current-year option calculates instalments based on an estimate of the net tax owing for the current year.

In addition to that publication, the CRA issues Instalment Reminder Notices. These suggest an amount to pay, and list the afore-mentioned payment options. In February and August, individuals who may have to pay income tax by instalments, usually receive such notices. The February reminder is for the payments to be made on or by March 15th and June 15th, while the August reminder is for the payments to be made on or by September 15th and December 15th. The amount suggested is arrived at by the no-calculation option, and is based on tax information from the assessed return for the second preceding taxation year, that is, 2006, if the particular taxation year is 2008. Each of these two instalments is equal to one-quarter of the net tax owing, plus any contributions payable to the Canada Pension Plan. To determine the September 15th and December 15th instalments for the 2008 taxation year, the total amount of the March and June instalments is subtracted from the net tax owing for the immediately preceding taxation year, which is 2007. Next, the remaining amount is apportioned equally between the September 15th and December 15th instalments.

If an individual employs the no-calculation option or the prior-year option, the CRA will not assess interest or penalty, in accordance with subsection 161(4.01) of the Act, even if the actual net tax owing exceeds the instalment payments made. This would apply equally, where the CRA has sent an instalment notice to the individual for the current year, and that person had made a payment in accordance with the suggested amount. On the other hand, interest under subsection 161(2) of the Act would apply, if the individual makes instalment payments based on an estimate of taxes owing for the current year. A penalty, pursuant to section 163.1 of the Act, could apply as well.

Bob Skulski
Manager
Insolvency and Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate