Many Canadians are familiar with the annual tax filing process but unaware that they may also be required to pay their taxes in quarterly instalments. This system is designed for individuals whose income is not subject to sufficient tax withholding throughout the year. If you earn self-employment income, rental income, investment income, or are a retiree receiving certain benefits, you may fall into this category.
In this detailed guide, we’ll help you understand whether you need to pay taxes by instalments in Canada, how to calculate your payments, important deadlines, and how to avoid costly penalties.
1. What Are Tax Instalments?
Tax instalments are advance payments made to the Canada Revenue Agency (CRA) toward your income tax obligation. These payments are typically required when your taxes aren’t automatically deducted at source, such as through an employer’s payroll system. Instalments help spread out your tax bill over the year to avoid a large balance owing at tax time.
Think of them as quarterly “prepayments” of your future tax liability.
2. Who Needs to Pay Instalments?
You may need to pay your income tax by instalments if:
- Your net tax owing in the current year is more than $3,000 ($1,800 for Quebec residents)
- Your net tax owing in either of the two previous years was also more than $3,000
This applies to:
- Self-employed individuals
- People with rental income
- Those with significant investment income (interest, dividends, capital gains)
- Retirees receiving income from pensions, RRIFs, or annuities without full withholding
- Individuals who receive COVID-related benefits or CERB with insufficient tax withheld
Note: Even if you’re a salaried employee, you may still need to pay instalments if you have secondary income sources or if your employer does not withhold enough tax.
3. How Are Instalment Payments Calculated?
The CRA offers three methods to calculate your instalment payments:
a) No-calculation option
The CRA calculates your instalments based on your previous two years’ tax liabilities. This is the safest option to avoid interest or penalties if your income remains consistent.
b) Prior-year option
Base your payments on the tax you owed last year. This option works well if your current year income is similar to the previous year.
c) Current-year option
You estimate your current year’s tax obligation and pay based on that. If your income is significantly lower this year, this method can reduce your payment burden—but if your estimate is off, penalties may apply.
4. CRA Instalment Reminders
If the CRA determines you should be making instalments, they will send one of the following notices:
- Instalment reminder: Sent in February and August outlining the amount and due dates
- Instalment payment request: Sent when the CRA identifies you likely need to pay but haven’t started
You are not required to follow the CRA’s suggested amounts—but failing to make sufficient payments could result in interest charges or instalment penalties.
5. When Are Instalment Payments Due?
Instalment payments are due quarterly:
- March 15
- June 15
- September 15
- December 15
If a date falls on a weekend or holiday, the payment is due the next business day. It’s crucial to make these payments on time to avoid penalties.
6. How to Make Instalment Payments
There are several ways to make your instalment payments to the CRA:
- Online through CRA My Payment
- Through your bank’s online banking platform (use “CRA – Tax Instalment” as payee)
- Using the Pre-authorized debit (PAD) setup through CRA MyAccount
- By mailing a cheque with an instalment remittance voucher (Form INNS3)
Using online and automatic payment options helps avoid missed deadlines and provides immediate confirmation of payment.
7. What Happens If You Don’t Pay?
If you miss or underpay your instalments, the CRA may charge:
- Instalment interest: Calculated at the CRA’s prescribed rate, compounded daily
- Instalment penalty: Applied if your instalment interest exceeds $1,000 in a year
You can reduce your instalment interest by making catch-up payments or choosing a payment plan in advance.
8. Can You Reduce or Cancel Instalments?
If your income decreases during the year and you expect to owe less than $3,000 in tax, you may stop or reduce your instalment payments. However, this decision should be made cautiously. If you underpay, CRA may still assess interest and penalties at year-end.
To avoid risk, use the current-year calculation method carefully or consult a tax professional.
9. Instalments for Self-Employed and Business Owners
Self-employed individuals often owe taxes because there is no withholding on their business income. They may also owe:
- Canada Pension Plan (CPP) contributions (both employee and employer portions)
- GST/HST instalments if registered for GST/HST
It’s essential to budget for both income tax and other contribution obligations. Many self-employed Canadians set aside 25–30% of their income for taxes and make quarterly instalments accordingly.
10. Final Thoughts
Tax instalments can feel like an added burden, but they’re essential for staying compliant and avoiding large balances at tax time. Understanding when and how to pay instalments is critical if you earn non-salaried income or receive benefits without withholding.
Be proactive: review CRA reminders, calculate your estimated tax owing, and make your payments on time. When in doubt, consult a tax advisor to determine whether instalments apply to you and how to plan your finances accordingly.
Fulfilling your instalment obligations can prevent financial strain and ensure you stay on the CRA’s good side—making tax season a lot less stressful.
