If you are reading this article, it is likely because you just finished your first year as a profitable business.

So congratulations!

You might be thinking: “I just paid my taxes for last year, now I have to prepay for next year? But why?”

Well, the bad news is, you’re exactly right. This is what we call the first-year double whammy. When you are required to make business tax instalments, you either make the payments, or pay instalment interest – and nobody wants to pay interest. Here, we cover how to pay them, why this is valuable information for your business, and answer questions like: What are instalments? Why am I required to pay them? And much more. Side note: They are commonly referred to as business tax instalments, corporate tax instalments, CRA tax instalments, and so on. But these terms all mean the same thing.

Change how you think about business tax instalments: A tool to help you run a successful business

One of the biggest challenges that business owners have is knowing exactly how much money is “theirs”. We see it every year, new clients come to us with a problem: they have a massive tax bill and no cash left in their business. So what happened? The most common reason is because they took a “dividend” and did not anticipate their corporate or personal taxes that they needed to pay on those funds (to understand how dividends are taxed, see this article).

For this very reason, we often recommend that shareholders pay themselves via a wage. This way, income taxes are remitted on a regular basis, often resulting in a refund. Not sure how to pay yourself? Click here for the answer.

Ultimately, as a business owner, you need to have the discipline to pay yourself no more than what you are making (after taxes are paid) and ensure that you are setting funds aside to prepare for that first year “double whammy”.

What are business tax instalments?

So, what are instalments? They can be thought of as pre-payments into next year’s taxes. Generally, they are estimated based on your previous year’s tax bill. They are required to be made throughout the year to cover the taxes normally paid in one lump sum on April 30 of the following year. These instalments are paid during the year while earning the income, similar to how an employer deducts tax directly from each pay period when paying employees. Failure to pay instalments when you are required to make payments will result in accumulated interest – so be sure to listen to your accountant!

How do instalments work?

There are 2 parameters that work independently of each other:

You need to determine whether you are required to pay instalments
You will need to determine how much you are required to pay

Do I need to pay instalments?

You are required to make instalments, if your balance owing before instalments (in any of the 2 prior years) is greater than $3,000.

How much am I required to pay?

The total instalments required in a given year equals your total balance owing before instalments in the prior year. There are a number of scenarios that may occur:

You pay the required instalments, and you owe significantly more than the prior year: You will not be assessed instalment interest because you made the required instalments.
You do not pay the required instalments and you owe the same, or more than the prior year: You will be assessed instalment interest but it will be based on the instalment schedule.
You pay the required instalments, and you owe significantly less than the prior year: You will receive a refund of the excess instalments, and will not be assessed instalment interest
You do not pay the required instalments and you owe less than the prior year: You will be assessed instalment interest only if the balance owing is greater than $3,000 before instalments. However, the assessed instalment interest will be based on the balance owing in the current year rather than the instalment schedule (which will be less). In other words, if you will actually owe less than the prior year (or won’t be in a balance owing at all), then you can reduce (or eliminate) your instalment payments.

Here is a chart showing the different scenarios, and the various outcomes:

	Tax owing is more is more the calculated required instalments for the year	Tax owing is less than the calculated required instalments for the year
Required instalments are paid	No instalment interest	No instalment interest
Required instalments are not paid	Instalment interest calculated based on instalment schedule	Instalment interest calculated based on the actual amount owing (rather than the instalment schedule)

When do I need to pay instalments?

Generally, corporate income tax instalments must be paid monthly either on or before the last day of the month, or quarterly. But not all businesses can make payments quarterly – quarterly payment eligibility is based on this criteria. Instalment payments are due on the same day of each month (or quarter, for those eligible). You can view your instalment due dates using the “Calculate and pay instalment payments” service in your CRA My Business Account.

How much should instalments be?

There are various acceptable methods to calculate this based on different iterations of the prior 2 years. Click here for how to calculate your instalment payments.

Business tax instalment tips:

Our recommendation is simple: pay your instalments, don’t get behind, and always ensure you set money aside for all your tax liabilities (GST, payroll, income taxes). This is a fundamental element of running a successful business.

Business Tax Instalments: What are They & Why Am I Required to Pay Them in Canada?