If you’re self-employed in Canada, you don’t have an employer to deduct income tax from your earnings. This means you are responsible for ensuring the Canada Revenue Agency (CRA) receives your tax payments throughout the year. One of the most effective ways to avoid a hefty bill at tax time—and CRA instalment interest—is to make quarterly instalment payments. This guide provides a step-by-step breakdown of how to calculate your quarterly tax instalments and stay on the CRA’s good side.
1. What Are Quarterly Tax Instalments?
Quarterly tax instalments are prepayments made to the CRA four times a year. These instalments help you meet your annual income tax obligations when you don’t have taxes withheld at source (e.g., wages, pensions). They’re required if your net tax owing is above a certain threshold.
2. Who Must Pay Tax Instalments?
You must pay instalments if:
- Your net tax owing is more than $3,000 in the current year and either of the two previous years ($1,800 for residents of Quebec).
- You earn income from self-employment, rental properties, investments, or contract work.
- Your withholdings (if any) are insufficient to cover your total tax owing.
The CRA typically sends Instalment Reminders in February and August. However, even if you don’t receive one, you’re still required to pay if you meet the thresholds.
3. Due Dates for Quarterly Instalments
CRA expects quarterly payments on the following dates:
- March 15
- June 15
- September 15
- December 15
If the due date falls on a weekend or holiday, the payment is due the next business day.
4. Methods for Calculating Instalments
There are three CRA-approved methods to calculate your instalments. Each method is acceptable, but the safest one depends on your income stability and predictability.
a) No-Calculation Method
This method relies on the CRA’s reminders, which are based on your tax payable from the last two years. You simply pay the amounts listed in the Instalment Reminder. It’s the safest method to avoid interest and penalties, especially if your income is steady.
b) Prior-Year Method
Estimate your instalments based on last year’s total tax owing and divide it by four.
Example: If you owed $8,000 last year, your quarterly payments will be $2,000 each.
c) Current-Year Method
This method lets you estimate your current year’s income and base your payments on that figure. It’s best used when your income this year will be significantly lower than in previous years. But if you underestimate, CRA may charge interest on the shortfall.
5. Step-by-Step: Calculating Instalments for Self-Employed Income
Step 1: Estimate Your Net Self-Employed Income
Start with your projected gross business income. Subtract eligible business expenses to arrive at your net self-employed income.
Example:
Gross Income: $80,000
Business Expenses: $20,000
Net Income: $60,000
Step 2: Calculate Your Estimated Income Tax Owing
Use marginal tax rates to estimate your total tax bill. This varies by province and includes both federal and provincial tax.
Assume your average combined tax rate is 25%. Then:
$60,000 × 25% = $15,000 estimated taxes owed
Step 3: Divide Tax Owing into Quarterly Instalments
$15,000 ÷ 4 = $3,750 per quarter
Step 4: Consider CPP Contributions
Self-employed individuals must also contribute to both the employer and employee portions of the Canada Pension Plan (CPP).
For 2025 (based on prior year figures), the CPP rate is 11.9% on net income between the basic exemption ($3,500) and the maximum pensionable earnings ($68,500).
CPP Contribution: ($60,000 – $3,500) × 11.9% = $6,713.50
Step 5: Add CPP to Total Tax
Income Tax: $15,000
CPP: $6,713.50
Total Owing: $21,713.50
Quarterly Instalments: $21,713.50 ÷ 4 = $5,428.38
6. How to Make Your Instalment Payments
- Online Banking: Add CRA as a payee (e.g., “CRA Instalment”)
- CRA My Account: Pay via Interac or set up pre-authorized debit
- Mail: Send cheque with an Instalment Remittance Voucher (Form INNS3)
- Third-Party Services: Use services like PaySimply or Plastiq
7. What Happens If You Miss an Instalment?
If you don’t pay instalments or underpay, CRA will charge instalment interest. The current interest rate is typically the CRA prescribed rate + 4%, compounded daily. You may also face penalties if your shortfall is significant.
8. Tips to Avoid Instalment Interest Charges
- Use the No-Calculation Method if your income is similar to previous years
- Set up a separate savings account and deposit 25-30% of each payment you receive
- Use budgeting tools or apps to track tax obligations
- Submit voluntary extra payments if your income fluctuates
- Increase tax withholdings on other income sources to reduce required instalments
9. Special Situations
If your income varies significantly (e.g., seasonal work, commission-based sales), calculate monthly income and reassess quarterly. You can switch from the Prior-Year to the Current-Year Method as needed, just ensure the CRA receives enough to cover your eventual taxes owed.
10. Conclusion
Quarterly instalments can seem intimidating at first, but they’re a powerful tool for managing self-employed tax obligations. By estimating your net income, applying tax and CPP rates, and making timely payments, you can avoid surprise bills and costly CRA interest charges. Whether you’re just starting your business or have been freelancing for years, understanding and implementing instalments will keep you compliant and financially prepared.
