If you’ve ever received a letter from the Canada Revenue Agency (CRA) asking you to pay tax instalments, you may also be at risk of facing instalment interest charges if you don’t comply. Many Canadians—especially those who are self-employed, earn investment income, or receive rental income—are required to pay income taxes in instalments throughout the year. Failing to do so may result in unexpected interest penalties.
This guide explains when instalments are required, how the CRA calculates instalment interest, and—most importantly—how to avoid these extra costs legally and strategically.
1. What Are Tax Instalments?
Tax instalments are periodic payments made to the CRA throughout the year to cover income taxes that aren’t withheld at source (i.e., not deducted by an employer). This often applies to:
- Self-employed individuals
- Rental property owners
- Freelancers and gig workers
- Retirees receiving CPP, OAS, or RRIF income
- Investors receiving dividend or capital gain income
These payments are typically due in March, June, September, and December.
2. When Does CRA Require You to Pay Instalments?
You may be required to pay instalments if:
- Your net tax owing is more than $3,000 in the current year and either of the two previous years (or $1,800 for residents of Quebec)
The CRA typically sends out an “Instalment Reminder” or “Instalment Requirement” letter in February and August to those who fall within this category.
3. How Is Instalment Interest Calculated?
If you fail to pay the required instalments or underpay, CRA will charge interest on the missed or insufficient amounts.
The current instalment interest rate is calculated at CRA’s prescribed interest rate plus 4%, compounded daily. This rate is adjusted quarterly and can be costly over time.
Example: If you owe $5,000 in instalments and don’t pay, you could be charged interest from the due date until the balance is paid in full.
4. Three CRA-Approved Methods to Calculate Instalments
To avoid interest charges, you can use one of these three methods to determine and pay your instalments:
a) No-Calculation Method
Use the amounts suggested by CRA in the Instalment Reminder based on your most recent tax years. This is the safest method to avoid interest if your income is stable.
b) Prior-Year Method
Base your instalments on the amount of tax you owed last year. Suitable if your current year’s income is similar.
c) Current-Year Method
Estimate your income for the current year and pay instalments based on that. Best if you know your income will be lower—but beware: underestimating may result in interest and penalties if you’re wrong.
5. How to Avoid Instalment Interest Charges
1. Pay on Time
Always make your instalment payments by the due dates: March 15, June 15, September 15, and December 15. If the 15th falls on a weekend or holiday, the payment is due the next business day.
2. Use Pre-Authorized Debit
Set up a Pre-Authorized Debit (PAD) through CRA My Account or My Business Account. This ensures your payments are automatically deducted on the correct dates, avoiding human error or forgetfulness.
3. Adjust Withholdings at Source
If you’re employed or receiving pensions, you can ask for additional tax to be withheld. This reduces or eliminates the need to pay instalments altogether. Use Form TD1 to increase withholdings with your employer or pension administrator.
4. Pay the CRA More in Advance
You’re allowed to make extra payments to the CRA at any time. By overpaying early in the year, you create a credit balance that can offset future instalment requirements, reducing interest exposure.
5. Follow the CRA’s Suggested Amounts
Even if your income changes, paying the amount CRA specifies in its Instalment Reminder protects you from interest and penalties—even if your actual tax liability ends up being higher.
6. Use CRA My Account to Track Requirements
Log in to CRA My Account to check instalment balances, see reminders, and make payments quickly.
6. What Happens If You Don’t Pay?
If you skip instalments or underpay and owe more than $3,000 in net taxes at year-end, you’ll be subject to interest charges. In some cases, CRA may also impose instalment penalties if your payments were significantly late or insufficient. These are in addition to interest charges.
7. What If You Overpay?
Any overpayment made during the instalment period will be applied to your tax return at year-end. If you have no tax liability, CRA will refund the overpaid amount. No penalties apply to overpayment, though you won’t earn interest either.
8. Instalment Payments and Self-Employed Individuals
Self-employed Canadians often find themselves owing more taxes due to lack of withholdings. Planning ahead and paying instalments quarterly helps smooth cash flow and avoids a large lump sum at tax filing time. Use budgeting software or a tax spreadsheet to track your income and set aside funds regularly.
9. Frequently Asked Questions
Q: Will I be notified by the CRA if I’m required to pay instalments?
Yes. If you meet the income threshold, CRA will send Instalment Reminders in February and August. However, it’s your responsibility to comply even if you don’t receive a reminder.
Q: Can I pay all my instalments at once?
Yes. You can make one lump sum payment or pay in advance. Just make sure the total equals or exceeds the required amount to avoid charges.
Q: Can I pay online?
Absolutely. Use CRA My Account, your online banking app (choose “CRA Instalment”), or third-party providers like PaySimply or Interac e-Transfer.
10. Conclusion
Instalment interest charges from the CRA can be easily avoided with a bit of planning and consistency. Whether you choose to pay the CRA’s suggested amounts or base payments on your current income estimate, the key is to make timely payments and adjust your withholdings if necessary. Keeping track of your instalment obligations and paying ahead when possible can help you avoid costly surprises at tax time.
