Tax Instalments in Canada: When and How to Pay

Tax instalments are periodic payments you make to the Canada Revenue Agency (CRA) during the year toward the income tax you expect to owe, instead of paying the whole balance when you file. If you are self-employed, no employer withholds tax from your business income, so CRA often expects quarterly tax instalments throughout the year.

Why CRA asks sole proprietors to pay instalments

Employees have tax deducted at source from every paycheque. A sole proprietor does not. Your net business income is reported on your personal return, and the tax on it is calculated only after the year ends. To smooth out that gap, CRA may ask you to prepay through instalments.

Instalments are not a separate tax or a fee. They are payments on account of the tax you already owe, based on what CRA has assessed for you previously. When you file, the instalments you paid are credited against your balance.

Who has to pay quarterly tax instalments?

CRA generally expects instalments when your net amount owing is above the threshold it sets, either for the current year or one of the two prior years. If you had a large balance owing last spring, an instalment reminder is likely on the way. Confirm the current threshold on the CRA website, because it is updated from time to time.

Common triggers for a sole proprietor include:

• Your first profitable year, with no tax withheld at source.
• A jump in revenue or a large one-time contract.
• Income from which no tax was deducted, such as consulting or freelance work.
• Rental or investment income added on top of business income.
• A GST/HST account where CRA asks annual filers to pay by instalments.

If annual filing is new to you, start with how to file taxes as a sole proprietor and then come back to the payment schedule.

The quarterly instalment schedule

For most individuals, CRA instalments are due four times a year. The table below shows the typical pattern — always confirm the exact dates on the CRA website.

If a due date falls on a weekend or a public holiday, the deadline typically moves to the next business day. Farmers and fishers may have different instalment options, so check the rules that apply to your situation.

How CRA calculates your instalment amount

CRA normally offers a choice of methods, and you are allowed to pick the one that fits your year:

1. No-calculation option — pay the amounts CRA shows on your reminder, usually based on your most recent assessed return.
2. Prior-year option — base each payment on the tax you owed in a previous year.
3. Current-year option — estimate the tax you will owe and divide it across the four dates.

The current-year estimate is often the most accurate if your income is rising or falling. Paying a little more than required is usually safe: any excess is applied to your balance or refunded. It is worth cross-checking the numbers against your T2125 Statement of Business Activities and your CPP contributions, which are part of the same calculation.

How to make a CRA instalment payment

Payments can be made in several ways:

• Through CRA My Business Account or My Account, using a pre-authorized debit or a bill payment.
• Through your bank's online bill payment service, using your Business Number or SIN as the account identifier.
• By credit card or debit through a third-party service provider, which may charge its own fee.
• By mail with a remittance voucher, if you prefer paper.

Whichever route you use, make sure the payment is applied as an instalment rather than to another account. Self-employed people often run a GST/HST account alongside their income tax account, so good record keeping matters — see how to file a GST/HST return for the filing side.

Interest and penalties on instalments

If you pay too little, CRA may charge instalment interest on the shortfall above the limit it applies, and that interest compounds. An instalment penalty can also apply where the shortfall is large enough. Rates change, so confirm the current figures on canada.ca rather than relying on last year's numbers.

If you pay more than you needed to, there is no penalty — the extra amount sits as a credit and reduces your final balance or increases your refund.

Practical tips for sole proprietors

• Set aside a percentage of every client payment in a separate savings account.
• Review your instalment position after you file, not just in the spring.
• Update your estimate when a big contract starts or ends.
• Remember that CPP for self-employed Canadians is part of what you owe, so build it into your estimate.
• If cash flow is tight, look at how to pay yourself from a sole proprietorship to see what is realistic.

This guide is general information, not tax advice. Your instalment situation depends on your own numbers, so confirm the details with CRA or a qualified tax professional.