Tax Instalments

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adrian2
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Re: Tax Instalments

Post by adrian2 »

tedster wrote:?? I really do not get why it is a "false reason"? They say pay 4k per quarter, so I pay that. At the same time the RRIF is sending them 1K. So if all they want is the 4 k< then I am over paying by 1K. No?

If I send them 3K and they get 1K from the RRIF, why am I at peril?
The CRA installment schedule assumes your income and deductions will be the same from one year to the next. It also assumes the entities which are withholding taxes will continue their withholding the same way. Therefore, you cannot deduct withholding taxes from the required amounts, or if you do, you do at your own risk of underpaying.

Using totally made up numbers:
- in 2015, withdraw $40k over minimum from RRIF, $12k withholding tax, $100k total income from all sources, $16k net tax payable in April 2016.
- CRA send you installment reminders to pay 4 quarterly installments of $4k
- in 2016, withdraw again $40k over minimum from RRIF, $12k withholding tax, $100k total income from all sources.
- if you did what you're suggesting, you would have subtracted the withholding tax of $12k from $16k and paid just $4k in installments, ending up with $12k net tax payable in April 2017
- oops, CRA slaps interest and penalties because you owe them more than $3k and you chose not to follow the prescribed numbers.
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Re: Tax Instalments

Post by SQRT »

tedster wrote:adrian2 wrote

tedster wrote:
I pay what they ask and because the RRIF is also remitting taxes, I am over paying.
That is a false reason; you are not overpaying because of that.

tedster wrote:
So I try to remove that from the amount that I pay them.
Do it at your own peril.
?? I really do not get why it is a "false reason"? They say pay 4k per quarter, so I pay that. At the same time the RRIF is sending them 1K. So if all they want is the 4 k< then I am over paying by 1K. No?

If I send them 3K and they get 1K from the RRIF, why am I at peril?
My understanding is they simply ask for the previous year's tax owing (plus previous year's instalments). As this will include any previous RIF deductions the tax amount will be correct. Added: Just read Adrian's reply and seems like he said the same thing.

I have struggled with this somewhat over the years as well. I get three pension amounts from my previous employer and they treat each one separately for tax deductions. This results in a systematic under withholding. Took me a while to figure this out. Also, each year my dividends increase, and recently tax rates have increased. Some years I realize cap gains and some years I don't. Why screw around trying to figure it all out when the cost of over installing is so low?

For 2016 I will have a bigger problem as I realized a lot of cap gains in 2015 and thus owed a lot of tax on filing. This will translate into a very large request for instalments starting in Sept. I doubt I will owe as much in 2016 but I can't be sure. So I will pay the request. A bit of a strain on cash flow but manageable.
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Re: Tax Instalments

Post by freedom_2008 »

For those who always do their own tax returns, you should know by, say Dec 15th or 20th, how much total tax (including all your plans) you should pay for the year, and that should be more accurate than what CRA asked based on your last year's total owing.

So if you don't like doing CRA-suggested installments, you could just wait until Dec 15th or 20th, and send CRA the total tax for the year (subtract your other plans have payed for you, and $2000 or so if you like to pay the small remainder amount on next April). We have been doing this (but not the $2000 part on purpose) for years, and CRA has no issue with it. Actually they stopped sending us installments request after we started doing it.

Of course, if that is what one has been doing, he/she wouldn't ever receive CRA installment request in the first place. :wink:
Last edited by freedom_2008 on 01 May 2016 12:16, edited 1 time in total.
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Re: Tax Instalments

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freedom_2008 wrote:For those who always do their own tax returns, you should know by, say Dec 15th or 20th, how much tax you should pay for the year, and that should be more accurate than what CRA asked based on your last year's total owing.

So if you don't like doing CRA-suggested installments, you could just wait until Dec 15th or 20th, and send CRA the total tax for the year (subtract your other plans have payed for you, and $2000 or so if you like to pay the small remainder amount on next April). We have been doing this (but not the $2000 part) for years, and CRA has no issue with it. Actually they stopped sending us installments request after we started doing it.

Of course, if that is what one has been doing, he/she wouldn't ever receive CRA installment request in the first place. :wink:
That sounds like a good plan. Should have done it last year I guess. Too late for this year, If you always owe tax and wait until the end of the year to pay it, wouldn't that result in penalties?
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Re: Tax Instalments

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SQRT wrote: That sounds like a good plan. Should have done it last year I guess. Too late for this year, If you always owe tax and wait until the end of the year to pay it, wouldn't that result in penalties?
The tax is owed for the year and you pay it before end of the year. I don't see why there would be any penalty?
Last edited by freedom_2008 on 01 May 2016 12:19, edited 1 time in total.
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Re: Tax Instalments

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freedom_2008 wrote:For those who always do their own tax returns, you should know by, say Dec 15th or 20th, how much tax you should pay for the year, and that should be more accurate than what CRA asked based on your last year's total owing.
Not all distributions are known by those dates. There is no knowledge of the allocation of components from REITs and ETFs and December distributions are not all in by Dec 15-20. One would have to be conservative in assuming all such distributions, estimated or otherwise, would have to be Other Income and not ROC, etc. Your suggestion is highly risky for anyone other than extremely competent taxpayers. How is that worth maybe* $50-100 pre-tax interest @ 1.5% for 'accelerated tax payments'?

*$5k per quarter installment payments works out to less than $75 pre--tax if all that money had been held back until circa Dec 15th.
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Re: Tax Instalments

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AltaRed wrote: Your suggestion is highly risky for anyone other than extremely competent taxpayers.
You don't need to be, If you don't have that much EFTs and REITs. :)
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Re: Tax Instalments

Post by pmj »

freedom_2008 wrote:Actually they stopped sending us installments request after we started doing it.
Does this mean that you paid the requested installments and made a payment for the full estimated taxes for that year? Presumably just paying installments wouldn't be enough to stop installment requests?
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Re: Tax Instalments

Post by OnlyMyOpinion »

Some CRA guidance:
You want to reduce or eliminate the amount of your instalment payment: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... #rdcpymnts

Calculation options. You have three options to choose from to calculate your instalment payments: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... g-eng.html

Prior-year option. This option is best for you if your 2016 income, deductions, and credits will be similar to your 2015 amount but significantly different from those in 2014. You determine the amount of your instalment payments based on the information from your income tax and benefit return for the 2015 tax year. Use the Calculation chart for instalment payments for 2016 to help you calculate your total instalment amount due: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... ll-16e.pdf
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Re: Tax Instalments

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freedom_2008 wrote:
SQRT wrote: That sounds like a good plan. Should have done it last year I guess. Too late for this year, If you always owe tax and wait until the end of the year to pay it, wouldn't that result in penalties?
The tax is owed for the year and you pay it before end of the year. I don't see why there would be any penalty?
If you are required to pay instalments but you wait until the end of the year to pay an amount, I think there would be penalties?
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Re: Tax Instalments

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SQRT wrote:If you are required to pay instalments but you wait until the end of the year to pay an amount, I think there would be penalties?
The trick is that once you prepay enough, then the next year you won't get an instalment notice if your tax was below the threshold. Then every subsequent year you can simply pay your tax by the end of the year since you didn't get an instalment notice to pay every quarter. Keep doing it every year and you'll never get an instalment notice - so no penalty.

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Re: Tax Instalments

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pmj wrote:
freedom_2008 wrote:Actually they stopped sending us installments request after we started doing it.
Does this mean that you paid the requested installments and made a payment for the full estimated taxes for that year? Presumably just paying installments wouldn't be enough to stop installment requests?
No, we didn't pay the requested installments, but just the full real tax at the end of year. Actually the installment by CRA is really the "suggested" amount, not the "requested" amount, as you know better how much you owe this year than them. Even if the full payment you payed is a bit off, as long the the reminder amount on next April is small, say around 1000 or so, it should not be an issue, and we never have any issue with CRA this way.
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Re: Tax Instalments

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freedom_2008 wrote:
AltaRed wrote: Your suggestion is highly risky for anyone other than extremely competent taxpayers.
You don't need to be, If you don't have that much EFTs and REITs. :)
True, but a good number of taxpayers* who are in installment territory are indexers and/or have mutual funds and/or REITs. Just being cautious as others have said...that the potential for penalties and interest would outweigh the tax deferment value of overpayment.

* With my circa 5-10% weighting in REITs and another circa 45% of the portfolio (ex-Canada) in ETFs, I cannot take the risk of substantial underpayment. Hence I just do the CRA suggested installment routine.
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Re: Tax Instalments

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SQRT wrote: If you are required to pay instalments but you wait until the end of the year to pay an amount, I think there would be penalties?
You will at least have to pay interest on the amount your payments fall short from the time they were due. I've had that happen to me. It's possible CRA might try and charge some sort of late payment fee on top of that if you ignored the payments altogether.

It's not too big a deal though. It's not like you are not paying your taxes, you're just not paying them as promptly as the revenuers want you to.
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Re: Tax Instalments

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SQRT wrote:If you are required to pay instalments but you wait until the end of the year to pay an amount, I think there would be penalties?
Yes. CRA will want interest and possibly penalties. There is a reason they specify quarterly payments -- they want the benefit of the cash flow.

On the other hand, if you are late with one installment, you can usually make it up by being early with the other installment. That's hard to do if you are waiting until the end of the year.

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Re: Tax Instalments

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SQRT wrote: If you always owe tax and wait until the end of the year to pay it, wouldn't that result in penalties?
It would likely result in instalment interest, and (if the instalment interest was large enough), instalment penalties too.
CRA's explanation here :http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... t-eng.html
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Re: Tax Instalments

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AltaRed wrote: True, but a good number of taxpayers* who are in installment territory are indexers and/or have mutual funds and/or REITs. Just being cautious as others have said...that the potential for penalties and interest would outweigh the tax deferment value of overpayment.

* With my circa 5-10% weighting in REITs and another circa 45% of the portfolio (ex-Canada) in ETFs, I cannot take the risk of substantial underpayment. Hence I just do the CRA suggested installment routine.
Agreed, paying by installment instructions is probably the easiest way in your and similar cases.

Just wanted to point out that there are other ways to handle and avoid CRA installment requests, as long as one pays his/her tax dues by end of the year. And CRA didn't charge us any interests when we did that.
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Re: Tax Instalments

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adrian2 wrote
The CRA installment schedule assumes your income and deductions will be the same from one year to the next. It also assumes the entities which are withholding taxes will continue their withholding the same way. Therefore, you cannot deduct withholding taxes from the required amounts, or if you do, you do at your own risk of underpaying.

Using totally made up numbers:
- in 2015, withdraw $40k over minimum from RRIF, $12k withholding tax, $100k total income from all sources, $16k net tax payable in April 2016.
- CRA send you installment reminders to pay 4 quarterly installments of $4k
- in 2016, withdraw again $40k over minimum from RRIF, $12k withholding tax, $100k total income from all sources.
- if you did what you're suggesting, you would have subtracted the withholding tax of $12k from $16k and paid just $4k in installments, ending up with $12k net tax payable in April 2017
- oops, CRA slaps interest and penalties because you owe them more than $3k and you chose not to follow the prescribed numbers.
If I understand what you are saying, CRA assumes that the RRIF will give them 12K and I will give them 16 in 4 instalments of 4K. This then ends up with a total net tax of 28K? If however, the total net tax is 16k from all sources and the RRIF sends 12K and I send 4 x 4K, I should get a refund of 12K? I must be having another bad day with numbers. I am sure you are correct, but I don't get it.
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Re: Tax Instalments

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Tedster,

I will try to help out here.

Yearly, CRA learns exactly how much income tax you ought to have paid in the previous year. CRA learns this at tax time when you have sent in your T1. IOW they get the exact number of how much ought to have been paid in the previous year after adjusting with the income tax return submitted in April of the following year. It is this adjusted number which is used to calculate the suggested quarterly instalments.

CRA will subtract from this "initial" number the amounts which it has reason to believe will be withheld at source (example tax withheld on RRIF withdrawals or pension payments, etc...). It is this final number that is used to calculate the actual quarterly payments.

Whatever dollar amount appears on the suggested quarterly amounts by CRA has already taken into consideration what CRA believes that it will receive through tax withheld at source by the administrator of the RRIF or the Pension.

So, If CRA estimates that you will have total tax to pay in 2016 of 20K$ and CRA believes that 8K$ will be withheld at source by your RRIF administrator then the quarterly instalments will be for a total of 12K$ (3K$ per quarter).

edited to correct a stupid math mistake. :oops:
Last edited by StuBee on 01 May 2016 21:31, edited 1 time in total.
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Re: Tax Instalments

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Okay, now I get it. Thanks to all for the clarification. So they only tell me what I have to add to the withheld tax. I must be the only person in the world who can add 2 numbers and get three answers. Okay, I will pay the instalments before year end in total. Although I notice that I get the notice some time around the end of March and the first two instalment they recommend are low low, and then the next two are pretty high :)
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Re: Tax Instalments

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tedster wrote:adrian2 wrote
The CRA installment schedule assumes your income and deductions will be the same from one year to the next. It also assumes the entities which are withholding taxes will continue their withholding the same way. Therefore, you cannot deduct withholding taxes from the required amounts, or if you do, you do at your own risk of underpaying.

Using totally made up numbers:
- in 2015, withdraw $40k over minimum from RRIF, $12k withholding tax, $100k total income from all sources, $16k net tax payable in April 2016.
- CRA send you installment reminders to pay 4 quarterly installments of $4k
- in 2016, withdraw again $40k over minimum from RRIF, $12k withholding tax, $100k total income from all sources.
- if you did what you're suggesting, you would have subtracted the withholding tax of $12k from $16k and paid just $4k in installments, ending up with $12k net tax payable in April 2017
- oops, CRA slaps interest and penalties because you owe them more than $3k and you chose not to follow the prescribed numbers.
If I understand what you are saying, CRA assumes that the RRIF will give them 12K and I will give them 16 in 4 instalments of 4K. This then ends up with a total net tax of 28K? If however, the total net tax is 16k from all sources and the RRIF sends 12K and I send 4 x 4K, I should get a refund of 12K? I must be having another bad day with numbers. I am sure you are correct, but I don't get it.
CRA assumes that in 2016 your tax situation will be the same as in 2015.

In 2015, as per above:
- you withdraw $40k over minimum from RRIF,
- the RRIF withheld tax of $12k,
- your total income was $100k total income from all sources,
- $16k net tax payable in April 2016 (which works out to $28k total tax due, out of which $12k was withheld).

Your proposed course of action for 2016:
- you withdraw, same as in the previous year, $40k over minimum from RRIF,
- the RRIF withheld tax of $12k same as in the previous year,
- your total income is $100k total income from all sources, same as in the previous year,
- in April 2017, total tax due is $28k, same as in the previous year, out of which $12k was withheld, you paid only $4k in installments (your calculation $16k - 12k, which everybody on this thread told you not to do)
- tax due on filing next year = $12k
- interest and penalties apply
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Re: Tax Instalments

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tedster wrote:Okay, now I get it. Thanks to all for the clarification. So they only tell me what I have to add to the withheld tax. I must be the only person in the world who can add 2 numbers and get three answers
You don't have to add anything, just pay what they suggest you to pay.
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Re: Tax Instalments

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freedom_2008 wrote:Just wanted to point out that there are other ways to handle and avoid CRA installment requests, as long as one pays his/her tax dues by end of the year. And CRA didn't charge us any interests when we did that.
But that is where you and a few of us in this thread, including DavidR, disagree. Technically, CRA wants its cash flow on an ongoing basis, by the installment date, not just by December 31.

Now that said, I think I understand what you said is the secret to meake what you suggest work is to get above and beyond the issue of CRA notices on installment payments. For example, if you overpay in Year X by at least the total of the installment payments expected, and that that overpayment is not considered an installment payment, then you would get no installment payment requests by Sept of Year X+1, and if you continue to overpay by the amount of those remaining installment payments, there will be no installment payment request by Year X+2. Ingenious (I think) provided one is willing to overpay by a lot intiially to get this going. I am not sure this has any real value (the value limited only to the opportunity cost of a small amount of tax deferment.
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Re: Tax Instalments

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AltaRed wrote:
Now that said, I think I understand what you said is the secret to meake what you suggest work is to get above and beyond the issue of CRA notices on installment payments. For example, if you overpay in Year X by at least the total of the installment payments expected, and that that overpayment is not considered an installment payment, then you would get no installment payment requests by Sept of Year X+1, and if you continue to overpay by the amount of those remaining installment payments, there will be no installment payment request by Year X+2. Ingenious (I think) provided one is willing to overpay by a lot intiially to get this going. I am not sure this has any real value (the value limited only to the opportunity cost of a small amount of tax deferment.
There is no secret Alta. As OnlyMyOpinion also pointed out above, there are multiple options to pay for installments on CRA site as well. Choose one that best fits for you, and pay them before end of the year, no need to overpay (we never did). Also our tax dues are not very big, maybe there is the only secret of why CRA doesn't care when we pay during the year. :wink: Be it of any value or not, that is for people to decide themselves.
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Re: Tax Instalments

Post by AltaRed »

I am quite aware of the methodologies for paying installment payments. I've used all 3 in the past. The point I am getting at is avoiding installment payments altogether and yet not incur penalties or interest.
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