About Corporation Income Tax Instalment Penalties and Interest

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I will be giving you the generalized version, but here is the thing with Canada Revenue Agency and if you owe Income Taxes: Unless you make less than you did in the following year .. you are required to remit at least the amount you owed in the previous year – in advance – as instalments for the current and future taxation year. If you end up owing MORE taxes next year, than you did last year .. you are only required to remit up to the amount you owed last year. If you end up owing LESS taxes next year, than you did last year .,. you would only be required to remit enough instalments that would have covered the next year’s balance due.

It gets a little tricky, estimating instalments according to Canada Revenue Agency, and well .. guestimating it using the simple method and usually what most simple T2 programs also use – they make it simple.

Here’s A Hypothetical Example To Illustrate

– We will discuss the last taxation Year End of December 31, 2007
– There was no tax payable for the year end December 31, 2006
– The Tax payable for December 31, 2007 was approximately $66,000
– The company made an instalment payment for 2007 prior to March 31, 2008 in the amount of $80,000
– The T2 was filed at the end of June 2008, with a refund of ($14,000) received in cash.
– The monthly instalment requirement for 2008 was estimated to be $66,000/12 or $5,500 per month and by June 30th 2008 $33,000 should have been remitted by that point in time.
– The client will remit cheques in the amount $3,000 per month during the months September, October, November and December 2008
– By the end of 2008 .. only $12,000 of instalment payments would be made “on time” – well, actually DURING the time – when the minimum requirement will be $66,000.
– An estimate of earnings and income taxes for 2008 will be made shortly before January 15, 2009 and additional instalments will be made in January, February and March 2009 so that not only the $66,000 instalments would be remitted for 2008 taxation year, but PLUS an additional $80,000 (assume they will have a good year)

Instalment Arrears Interest is calculated based on a daily balance, at the prescribed rates. When instalment interest is more than $1,000, Canada Revenue Agency may charge corporation taxpayers an instalment penalty under section 163.1 of the Act.

But – How Much Is This Penalty? Here’s The Example

If you look at the image (click to enlarge) you will see the image of an excel spreadsheet of this example .. in its basic form .. to illustrate. Feel free to download the .xls file. It’s in Microsoft Excel version 7.0.

According to the calculation, based on the average monthly instalment requirement and prescribed rate of interest according to Canada Revenue Agency .. My client may be subject to Instalment Arrears Interest in the amount of $2,427.90.

What Canada Revenue Agency does now .. is:

(1) Add: Actual Instalment Arrears Calculations $2,427.90

(2) Deduct the greater of:
(a) $1,000.00
or
(b) 25% of the Instalment Interest calculated, with no payments applied (in this case $2,603.48) or $650.87

(3) The penalty is 50% of the above Calculation – $2,427.90 less $1,000.00 (the greater) = $1,427.90 x 50% or $713.95

>> Total Instalment arrears interest ($2,427.90) and penalty ($713.95) = $3,141.85

Another Reason Why You Should Make Instalment Payments If You Are Required To

Check out this simple EXCEL spreadsheet I created, as a basic example .. it’s stuff for the taking: http://1800HART.com/stuff/1800HART-INSTALMENT-INTEREST-AND-PENALTIES.xls

Actually, if you play with the spreadsheet – even if all the $66,000 instalment requirement was paid prior to the end of the year – the instalment interest arrears calculation would still exceed $1,000 and this taxpayer would be subject to the same penalty as I calculated above.

DOESN’T THAT SUCK? I THINK SO!

According to Income Tax Act (ITA 163.1)

Penalty for late or deficient instalments

163.1 Every person who fails to pay all or any part of an instalment of tax for a taxation year on or before the day on or before which the instalment is required by this Part to be paid is liable to a penalty equal to 50% of the amount, if any, by which

(a) the interest payable by the person under section 161 in respect of all instalments for the year
exceeds the greater of

(b) $1,000, and

(c) 25% of the interest that would have been payable by the person under section 161 in respect of all instalments for the year if no instalment had been made for that year.

NOTE: Application provisions are not included in the consolidated text; see relevant amending Acts. 1985, c. 55, s. 143.

Source: Department of Justice, 2009 Corporate Instalment Guide

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