How to figure out your quarterly tax figures

If the Canada Customs and Revenue Agency (CCRA) has notified you that you need to pay income tax install-the money is due on the 15th day of March, June, September, and December.

Installments are required if your “net tax owing” — the amount not covered by source deductions — was at least $2,000 for either of the past two years. (If you live in Quebec, the threshold is $1,200, because provincial tax is paid separately.)

Installment payments are most often required from the self-employed, who do not face automatic tax withholding at work. But it can also hit retirees, or people who have reported sizeable investment earnings in recent years.

You can use any of three methods to determine how much to pay: You can pay what the government tells you to; base your installments on what you paid last year; or estimate what you think you’ll owe for the current year. Each method has cer-tain advantages and disadvantages.

The no-calculation method. Twice a year CCRA sends a “reminder” invoice. The February 2003 mailing tells you what to pay on March 15 and June 15. The amount is based on your 2001 tax return.

The one sent in August (based on your 2002 return) covers the September and December installments.

Aside from convenience, this option’s big advantage is that you won’t be charged interest if you pay the invoice amounts and later find you owe more tax. The drawback is that you’ll pay more tax than necessary if your taxable income is lower in 2003 than it was in 2001 and 2002. You should get a refund, but only after you file your return.

The prior-year method. Each installment in this option equals one-fourth of the income tax and Canada/Quebec Pension Plan contributions you owed for last year (2002). If you earned less in 2002 than in 2001, your installments using this method will be less than they would be using the first method.

Be careful, however. You will be charged interest on any shortfall if your installments don’t fully cover your 2003 tax bill.
The current-year method. With this option, you estimate what you’ll owe for 2003, and pay one-fourth on each installment date. This works well if your current tax bite will be less than in 2002 and 2001.

Unfortunately, you could face an interest charge even if you wind up claiming a refund. That can occur if you earn more than expected and an installment made early in the year ends up covering less than 25% of your total tax.

Here’s an example. Suppose you pay installments of $2,000, $2,000, $3,000 and $4,000 over the course of the year, for a total of $11,000. When you file your return, you find that your actual tax due is only $10,000, so you can expect a refund. However, in the eyes of the CCRA, you should have paid at least $2,500 every quarter (that is, 25% of $10,000). As a result, your first two installments were insufficient, and you’ll be charged an interest penalty.

To ensure that you have the cash you need to pay installments on time, create your own withholding system. Subtract tax from everything you earn and park that money in a separate account until the due date.

You’ll avoid the stress of a last-minute scramble plus the risk of a late penalty. You’ll also earn interest while the money is in the bank.