4 May 1994 Administrative Letter 9401652 - 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.

Please note that the following document, although believed to be correct
at the time of issue, may not represent the current position of the
Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Bill C-136 refers to instalments "in the year, or for each of the 2
preceding taxation years"; Explanatory Notes refers to "both that year and

either of the two preceding years". Statements appears contradictory.

Correspondence also asks that several examples be considered for
requirements to remit instalments

Position TAKEN:

Statements not contradictory. Explan notes summarize when an individual

is req'd to make instalments. Para 156.1(2)(b) describes circumstances

when an individual is not required to make instalments.

Reasons FOR POSITION TAKEN:

interpretation of text

Sandra Short
XXXXXXXXXX 940165

May 4, 1994

Dear Sir,

Re: Proposed Amendments to Subsection 156(1) and Section 156.1 of the Income Tax Act

This is in reply to your letter of January 18, 1994 which contains a number of questions relating to the proposed amendments to subsection 156(1) and section 156.1 of the Act as originally released in Bill C-136 and subsequently reintroduced in Bill C-9 (first reading February 4, 1994). In the comments that follow, unless otherwise stated, all statute
references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act"). We will answer your questions in the order that they were presented to us.

I. Proposed Amendment to paragraph 156.1(2)(b) of the Act

The Explanatory Notes to both Bill C-136 and Bill C-9 (and page 9 of the 1993 T1 General Guide for Ontario) state that, generally, an individual outside Quebec at the end of a taxation year will be required to pay quarterly tax instalments during the year if the individual's federal and provincial income tax payable after deducting federal and provincial income taxes withheld at source (i.e. that individual's "net tax owing") is more than $2,000 in both that year and either of the two preceding years.

The proposed amendment to paragraph 156.1(2)(b) of the Act is drafted with a reference to "the individual's net tax owing for the particular year, or for each of the 2 preceding taxation years...". It is your view that the references to "both that year and either of the two preceding years" as found in the Explanatory Notes and the actual proposed amendment reference
to "the year, or for each of the 2 preceding taxation years" are conflicting. You have asked whether there is a plan to amend Bill C-136 (Bill C-9) to refer to "either" preceding taxation year.

The statements in the Explanatory Notes and as summarized in the 1993 T1 guide are correct and are statements which address circumstances where an individual is required to remit quarterly instalments. The proposed legislative amendment to paragraph 156.1(2)(b) is also correct and describes the circumstances when an individual is not required to make instalments. This subtle distinction can be illustrated by the following examples:

(i) An individual who resides outside of Quebec and whose chief source of income is not from farming or fishing has a 1995 net tax owing of $1500. The wording of proposed paragraph 156.1(2)(b) of the Act is such that that individual will not be required to make quarterly instalments for 1995 because the net tax owing "for the particular year" does not exceed $2,000.

(ii) The individual described in (i) has net tax owing of $2500 in 1995.

The individual's net tax owing in 1993 and 1994 was $1500 and $1800 respectively. No quarterly instalments would be required in 1995 because the individual's net tax owing "for each of the 2 preceding taxation years" did not exceed $2,000.

(iii) The individual described in (i) has net tax owing of $2500 in 1995.

The individual's net tax owing in 1993 and 1994 was $2500 and $1500 respectively. Quarterly instalments would have to be made in 1995 because that individual's net tax owing is more than $2,000 in "both that year (the current year) and either of the two preceding years".

II. Instalment Base - Effect of Taxes Withheld at Source

You have asked that we consider the example of an Ontario resident individual with a 1995 "net tax owing" of more than $2,000. Approximately $10,000 (over and above source deductions) will be owing April 30, 1996 in respect of a capital gain realized in 1995 if no tax instalments are paid.

You have asked us to assume that no capital gains deduction is available in respect of the gain and to ignore both the transition rules for 1994 (we presume you mean the references in the proposed amendments that state that the new rules are applicable only to amounts that become payable after 1994 or after June 1994) and the option to follow the Revenue Canada method described in paragraph 156(1)(b) in formulating a reply.

You believe that the draft wording to paragraph 156.1(2)(b) of the Act requires the individual to pay quarterly tax instalments for 1995 if he is not a farmer or a fisherman.

It is our view that your interpretation is accurate only if, in either 1993 or 1994, or in both 1993 and 1994, the individual's net tax owing was more than $2,000. In other words, if this individual's net tax owing for each of (both) 1993 and 1994 were less than or equal to $2,000, then no quarterly instalment payments would be required in 1995. This situation can be likened to example (ii) above. We will proceed on the assumption that the individual is required to make quarterly tax instalments for 1995.

You have stated that the rules for determining the amount of each quarterly instalment described in subsection 156(1) are unchanged and require the individual to pay an amount equal to (i) the 1995 year's estimated tax, or (ii) the instalment base for the 1994 taxation year.

Regulation 5300(1) and subsection 156(3) effectively set the 1994 taxes payable under Part I to be the individual's instalment base.

Draft subsection 156(1) makes amendments to that portion of the subsection preceding paragraph (a). The draft also proposes the repeal of that portion following paragraph (b). These proposed changes would remove the reference to the "3/4 test" (currently found in subsection 153(2) of the Act) in the opening preamble and, because of the addition of a general provision in proposed section 156.1 of the Act, requiring the payment of any remainder of tax owing by a taxpayer for a year by the taxpayer's balance-due day for the year, the closing reference regarding balance due-day currently found in 156(1) is repealed. However, you are correct that this amendment leaves the calculation for the quantum of the quarterly instalment unchanged. Each remittance is required to be 1/4 of (i) the amount estimated by the individual to be the tax payable under Part I by the individual for the year or (ii) the individual's instalment base for the preceding (1994) taxation year.

You have asked that in the example described above under II., we assume that taxes have been withheld at source on 1995 wages in an amount at least equal to the 1994 Part I tax liability (assumed to be the amount of the 1994 instalment base as defined in Regulation 5300). You have questionned whether it can be concluded that:

(i) no 1995 tax instalments are payable by the individual (because an amount equal to his instalment base - 1994 total Part I tax - has been remitted through withholding taxes) and

(ii) the $10,000 of tax owing on the 1995 capital gain will be payable in a single amount on April 30, 1996.

We agree that the quantum of each quarterly remittance may be calculated as zero in the example described by you under the current and proposed wording of subparagraph 156(1)(a)(ii) of the Act. It is the Department's policy to allow a taxpayer who is calculating instalments in accordance with subparagraph 156(1)(a)(ii) of the Act to reduce the aggregate of
instalment payments required by the greater of the prior year's tax withheld from the taxpayer's remuneration and other amounts and the current year's estimated tax withheld at source from such amounts. Form T1033-WS (Revised 1994) "Worksheet for Calculating Instalment Payments" makes allowances for income tax deductions at source on line 6.

We agree with your interpretation that any balance of tax owing is due by April 30, 1996.

III. Instalment Base - Effect of Change in Status

You have asked that we consider the example of an Ontario wage earner who becomes a partner in a partnership arrangement on February 1, 1993 with a January 31, 1994 year-end. Part I taxes for the wage earner/partner for 1992, 1993 and 1994 are $50,000, $3,000 and $55,000 respectively. You again request that we ignore the transitional rule for 1994 and the Revenue Canada instalment method (paragraph 156(1)(b) in both the current and proposed version of subsection 156(1) of the Act).

It is your view that, under proposed paragraph 156.1(2)(b) of the Act, instalments are required for the 1994 tax year because the "net tax owing" in 1994 is more than $2,000. Further, subsection 156(1) requires the amount of the instalment to be 1/4 of either

(i) the estimated tax for the 1994 year or $13,750 ($55,000/4) or

(ii) the instalment base, which is equal to Part I tax of the preceding (1993) year or $750 ($3,000/4).

It is not clear from the above that the "net tax owing" for 1992, 1993 or 1994 is more than $2,000. If we assume for the purposes of the example that the individual's "net tax owing" is in fact more than $2,000, then we agree that the individual is not relieved from an obligation to pay instalments as provided for by the (draft) exemption rules in paragraph 156.1(2)(b) of the Act.

If the amounts of $50,000 for 1992 and $3,000 for 1993 represent the individual's instalment base as calculated under Regulation 5300 of the Act, then we agree that the individual has the option of remitting quarterly instalments in the amount of either $13,750 or $750 (as calculated above) in the 1994 tax year.

We trust that the above comments are of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

c.c. Mary Chenette

T1 Interest Programs
Assessment of Returns Directorate
400 Cumberland, 6th Floor