Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Tax Matters

How to structure a cash-saving instalment plan Add to ...

I was on a plane travelling to Vancouver this week. I can handle turbulence - it doesn't bother me at all, but this trip was an exception. For whatever reason, our plane bounced around an awful lot. The man beside me handled it pretty well. He had enough drinks that it just didn't bother him. "I don't care if we crash - take her down," he said in a slur. The man across the aisle, on other hand, was in a panic. Apparently he had a lot to live for.

More Related to this Story

As it turns out, he was worried about making it to Sept. 15 - the deadline for his third quarterly tax instalment in 2010. "My wife has no idea that this amount is due next week" he said. "Don't worry," I reassured him. "The Canada Revenue Agency will make sure your wife knows about it." The story ended well. We landed safely in Vancouver, and I had the chance to share some ideas on how to minimize tax instalments with this gentleman, so that the next time he's in a life-and-death situation, he can rest easy.

The Deferral

Let's face it, the longer your own money can remain in your hands before you have to hand some of it to the taxman, the better. Many Canadians are painfully reminded every quarter when tax instalments are due that when it comes to your cash, it's easy-come, easy-go.

Having your money for one year longer than you might otherwise can make a difference over the long run. If, for example, you owe $20,000 to the taxman and can defer the payment of those taxes for one year, and you can do this every year so that you always have $20,000 in your pocket that might have otherwise been in the taxman's coffers, you could end up with about $100,000 more to your name after 25 years, assuming a 7.5 per cent return and little or no taxes (assuming something like investments in a Tax-Free Savings Account and an equity portfolio focused on growth).

The Rules

If you earn any income that is not subject to tax withholdings at source (such as business, investment or some pension income), you could be liable for tax instalments quarterly. How so? If your total tax bill, less the amount of tax that was withheld at source, is greater than $3,000 for both the current year and either of the two preceding years, you must make instalments for the current year. (In Quebec, which collects its own taxes, the figure is $1,800 for both federal and provincial taxes.)

If you're earning even $10,000 of interest or other investment income, for example, you could have instalment requirements. Those instalments are due March 15, June 15, Sept. 15, and Dec. 15. Failure to make instalments can result in interest and penalties. (The rules differ for farmers and fishermen; speak to a tax pro.)

The Canada Revenue Agency will send you a notice if you must make instalments. The CRA will calculate your March and June instalments based on your tax liability from the second preceding year. Your September and December instalments will be based on last year's tax liability. Your 2010 instalments, for example, will be calculated as follows: March and June will each be calculated as one quarter of your tax liability from 2008, while September and December will each be calculated so as to bring your total tax instalments for 2010 to equal your 2009 tax liability.

The Strategies

How can you minimize the cash remitted to the CRA throughout the year? First, if you don't receive an instalment reminder from CRA, you don't have to make instalments, even if your tax bill exceeds the $3,000 limit.

Next, you have the option of calculating your quarterly instalments using two other methods if you choose: (1) estimate your current year's taxes, less any tax that is withheld at source, and send the balance to CRA in quarterly instalments, or (2) pay an amount equal to last year's taxes (less any taxes withheld at source) in four quarterly instalments.

Finally, if you're self-employed or pay yourself from a holding company, you may be able to control the timing of your income to eliminate or minimize instalments. You could, for example, pay yourself dividends every second year rather than yearly. This would mean little or no tax every second year. You can then effectively eliminate or minimize tax instalments by basing your instalments on either the current year expected taxes or the prior year actual taxes, whichever year is a low-tax year.

 

Topics:

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories