On the other hand, if you have significant income from sources where there is no withheld tax, such as dividends, interest, capital gains, business income, or rental income, you may have to make quarterly instalments of tax.
Generally speaking, you are required to make quarterly instalments in a taxation year (current year), if, in the current year and one of the two preceding years, you have federal and provincial net tax owing of more than $3,000 (not including tax withheld at source such as from your pay cheque). For Quebec residents, the same rules apply but the threshold is $1,800 of federal tax owing.
The instalments are due quarterly, on the 15th day of March, June, September and December of the year. Late or insufficient instalments are subject to interest charges. However, if you “prepay” or overpay instalments, the amount you have overpaid earns “contra interest” or “offset interest” at the same rate as interest on late instalments, so you can avoid interest charges on late instalments by making other instalments early. If instalment interest charges exceed $1,000 for the year, you may be subject to a monetary penalty.
Remember that the tax instalments are essentially a “down payment” of your actual taxes owing for the year, which are due in full on April 30 of the following year. If your actual tax liability exceeds your instalments (and any tax withheld) for the year, you will be required to pay the excess by April 30. On other hand, if your instalments (and any tax withheld) exceed your tax liability for the year, you will get a refund.
Assuming you are required to pay quarterly instalments, they can be calculated in one of three ways, and you are entitled to choose the method that leads to the lowest instalments.
Method 1:
Each quarterly instalment equals ¼ of your estimated tax owing for the current year.
Method 2:
Each quarterly instalment equals ¼ of your net tax owing for the preceding year.
Method 3:
The first two instalments equal ¼ of your net tax owing for the second preceding year. The last two instalments each equal ½ of (preceding year net tax owing minus the first two instalments that were based on the second preceding year). Put more simply, the last two instalments are what is needed to make your total instalments equal your tax owing from the preceding year.
The third method is sometimes called the CRA instalment method because it is the method the CRA uses when they send instalment reminders to taxpayers. However, you are not obligated to follow this method and may choose whichever method you wish.
If you have late or insufficient instalments, interest will be charged relative to the method that provides the least amount of instalments (and therefore the least amount of interest charged).