By: David Christianson, BA, CFP, R.F.P., TEP, CIM
“Dollars and Sense”
I became unusually incensed a couple of weeks ago. CBC Radio had a national “news” piece, in which they interviewed a woman on the east coast who was outraged that the CRA had requested quarterly income tax instalments from her. “How am I supposed to pay these when I am out of work?” she exclaimed.
Good news was that she does not need to pay those instalments. Explanation to follow, but first the background.
The request was totally consistent with CRA practice over the last, say 30 years, so it shouldn’t have been a surprise and was certainly not “news.” But since the guest, the reporter and apparently the producer had no idea of how the system works, they jumped on what they saw as an opportunity to express outrage, rather than to inform.
When I calmed down, I realized that better information needs to get out to all taxpayers. Income tax instalments are actually pretty complicated, so here we go.
Why me?
If you had to pay more than $3,000 when you filed your taxes, you can expect to get an instalment request from CRA, especially if this has happened two years in a row.
The logic is that CRA’s computers assume you will owe this again next April 30. The government would much rather have the money in its hands during the year and then send you a refund when you file.
This may be ironic, as most taxpayers I know prefer to receive a refund, but that means they paid too much to CRA throughout the year. The better financial plan is to keep the chips on your side of the table as long as possible.
What are my options?
If you get an instalment request from CRA, you need to take it seriously, as failure to pay could result in interest and penalties. However, you have three choices of how to calculate how much you pay:
Option one is to pay exactly what is requested, the “no-calculation option.” This will avoid any interest or penalties.
However, the CRA request is based on your 2018 and 2019 results. The September and December amounts are based on the net tax owing from your 2019 return, less your March and June instalments already paid, which had been based on 2018 results.
Paying the requested amount might cause you to pay too much through the year and get a large refund as a result, if your income is less in 2020 or your deductions higher.
This would be the case if 2018 and/or 2019 were an anomaly in some way, for instance.
Option two is the “prior-year option,” in this case 2019 being the prior year. You can choose to pay 25 per cent of your 2019 tax owing on filing amount on September 15 and December 15. This works well if 2020 will be similar to 2019, but significantly different from 2018.
So, check your last two returns for one-time amounts like high capital gains (or losses), extra dividends, extra RRSP contributions or withdrawals, work bonus, etc. and especially any amounts that did not have tax withheld at source.
An extended layoff or furlough in 2020 will decrease your income, so that’s part of the calculation, offset by any CERB, EI or other payments.
Compare your expected income for 2020 to 2019 and 2018 and estimate how much you will owe when you file this year’s tax return in April.
It’s at best an estimate, but your mission is to try to pay the least amount possible through the year, but only pay less than your instalment request if you know you won’t owe on filing.
The interest and penalties are much higher than what you can earn on the money by keeping it, so don’t underestimate. Err on the side of paying a bit too much in instalments.
But to go back to the example that started all this, the subject at that CBC story simply had to deduct the one-time extra income she had in 2019, consider her lower 2020 income and tax withholdings, conclude that she will owe nothing in April 2021 when she files her tax return, and ignore the instalment request.
That’s a much better approach than going public and apoplectic, don’t you think?
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Portfolio Manager and Senior Vice-President with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.
