TAXATION - Reviewing Instalment Payments

Corporations are required to make tax instalment payments at the end of each month commencing with the first month in the corporate taxation year.

The Income Tax Act provides that a corporation has three options for making instalment payments:

12 instalments of 1/12 of the corporation’s "first instalment base" for the year

2 instalments of 1/12 each (based upon the corporation’s "second instalment base" for the year) plus 10 instalments of 1/10 of the amount that remains after deducting the first 2 instalment payments from the first instalment base, or

12 instalments of 1/12 of the current year’s estimated taxes.

Since a corporation can choose which of the instalment methods to use, it should choose the one that defers payments for as long as possible.

Instalment Base

Just what is the "instalment base"? The first instalment base is considered to be the tax payable for the immediate preceding taxation year and the second instalment base is the tax payable for the second preceding year.

What happens if one of the prior taxation years that are used to calculate current year instalment payments is less than 365 days? In this instance, the short year amount should be annualized to a yearly figure. If the prior period is less than 183 days, then the instalment base for that year is the greater of the annualized amount and the adjusted base for the next preceding taxation year of more than 182 days. Thus, if the calculation were based upon an 8-month period that had taxes payable of $40,000, the instalment base would be calculated on a base of approximately $60,000.

Instalment payments may not be required if the corporation’s estimated taxes for the current year or the first instalment base are less than $1,000.

If there has been an amalgamation of two or more corporations, then the instalment bases of all predecessor corporations are combined to determine the amount of instalments required. Similar rules apply where there has been a wind-up of a subsidiary that is at least 90% owned or there has been a non-arm’s transfer of all or substantially all (generally 90% or more) of the assets of a corporation.

Regardless of which base is used to calculate the current year instalment, the current year’s dividend refund will reduce the base. A dividend refund is received by a corporation that has refundable dividend taxes on hand at the rate of 1/3 of taxable dividends paid.

Estimated Taxes Payable

If your company’s income taxes have been increasing annually, the most sensible method of paying your income tax instalments is to base your current year’s payments on the previous two years’ income tax liabilities. However, if the income tax liability of your business appears to be decreasing in the current year, why place this working capital in the hands of the CCRA?

Rather than compute your instalments on the prior years’ instalment bases, it may be advantageous to calculate them on the basis of estimated income taxes payable. There may be situations that create a lower income tax liability in the current year than in previous years that you become aware of as the fiscal year progresses such as:

Your company may increase capital expenditures, thereby, increasing capital cost allowance deductions and possibly investment tax credits

A decrease in market share may signal a significant loss or reduction in profits, or

A significant increase in financing may create interest expense that lowers your profit position.

Balance of Tax

A corporation is generally required to pay the balance of its corporate taxes due within two months of its corporate year-end. However, companies that are Canadian-controlled private corporations throughout the year and that claimed the small business deduction in the year or the immediately preceding year may pay by the end of the third month. This extension is available as long as the aggregate of the taxable incomes of all associated companies in the group for the immediately preceding year did not exceed the aggregate of their business limits for the purposes of the small business deduction (generally $200,000).

The instalment bases and estimated taxes payable include the Part I taxes on income and the large corporations tax. Part IV tax on dividends received from Canadian corporations is due three months after the end of the year. No instalments are required on account of the Part IV tax liability.

Review your Tax Instalment Requirements

Be sure to monitor your income taxes payable situation carefully as the CCRA charges interest, compounded on a daily basis, on unpaid instalments. If your budget information is incorrect and your taxable income is actually equal to or greater than the previous year’s amount, your company will be required to pay interest on the difference between the instalments based on historical income taxes payable and the instalments actually made. Unfortunately, the interest expense is not an allowable deduction for the purposes of calculating taxable income.

Note that an instalment that is paid before it is required will earn interest credits. If you have been late with one or more payments, try to pay future instalments early. While the CCRA will not refund interest credits, the interest credits earned on the early payments will help reduce the interest charges that have accrued from the late payments.

In addition to instalment interest, there is a penalty of 50% of the instalment interest to the extent that it exceeds the greater of $1,000 and 25% of the interest that would be payable if no instalments had been paid.

Although in many provinces the instalment requirements parallel the Federal requirements, you should also monitor these taxes payable to avoid interest payments that may accrue on unpaid provincial taxes.

Talk to your Accountant

Your accountant can help you review your corporation’s tax instalments. Careful planning will not only help your company’s cash flow but also reduce the erosion of the bottom line that could occur if you are assessed for non-deductible interest on overdue amounts.