All annual GST/HST return filers who have $3,000 or more in net tax owing on their returns are required to make quarterly instalment payments in the following fiscal year. Why? Quite simply, the Canada Revenue Agency doesn't like to wait for its money, so it requires taxpayers to pay in advance, similar to the requirements imposed for corporate or personal tax instalments.
Calculating instalment payments
As with corporate tax, taxpayers can calculate quarterly instalment payment requirements through two methods: remitting one quarter of net tax from the previous year; or, alternatively, basing quarterly payments on the estimate of net tax for the current year if such tax is expected to be less than in the previous year. Where estimates turn out to be incorrect, however, instalment interest may result.
Proposed changes to instalment calculation
Ontario and British Columbia recently converted to the Harmonized Sales Tax (HST) regime, with new tax rates of 13% and 12% respectively. A new change for calculating the amount of instalment payments for the 2010 reporting period has also been proposed. The change proposes that payments that become payable after the first fiscal quarter beginning on or after July 1, 2010, will be equal to the lesser of ¼ of the amount of net tax for the current year, and ¼ of 240% of the amount of the net tax for the previous year.
Example:
A corporation operates in Ontario with a December 31 fiscal year-end. Its net tax for the 2009 fiscal year was $8,000. The net tax for the 2010 fiscal year will be $9,000. The pre-July 1, 2010, instalment payments calculation rules would determine that the payment is $2,000 ($8,000 / 4). After July 1, 2010, the new instalments would be the lesser of:
Thus, the corporation must increase its instalment payments to $2,240 to reflect the increase in net tax.
These rules will impact instalment payments going forward into 2011, as instalment base requirements will continue to be higher into 2011, until one entire year of HST is in effect.
At the time of writing this article, these proposed changes had not yet been passed into law. However, it is possible that, when passed, the rules may have retroactive effect.
New registrants
Annual filers in their first year of filing for the GST/HST return where the first year is less than a full fiscal year must prorate their net tax for the first short filing year, to determine if they need to make quarterly instalment payments in the next fiscal year. The proration is determined by dividing the net tax for the first short fiscal year by the number of months in that fiscal year. This provides the approximate monthly net tax. If the estimated amount is $3,000 or more per annum, instalment payments are required in the following year.
Due dates
Instalment payments are due within one month of the end of each fiscal quarter. Due dates falling on a weekend or public holiday are extended to the next business day. Starting in October, 2010, the CRA reduced the frequency of its mailing of Statement of Interim Payments notices from quarterly to semi-annual. However, payments are still required by the due dates, even if a remittance form is not received.
Example:
For a December 31 fiscal year-end, instalment due dates are as follows:
Fiscal quarters Instalment due dates January 1 - March 31 April 30 April 1 - June 30 July 31 July 1 - September 30 October 31 October 1 - December 31 January 31
Failure to make instalments
Failure to make required instalment payments will result in interest charges. Instalment interest is calculated beginning the day after the instalment was due and ending on the earlier of:
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the day the overdue instalment amount and any accrued interest is paid; and
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the day the net tax owing for the year is due.
The rate of interest charged is equal to the basic rate plus 4% on the overdue amount. Currently, the applicable rate is 5%.
Instalment requirements are a fact of business. They assist in ensuring taxpayers meet their tax filing obligations, and help to ease cash flow burdens at the end of the year. However, care should be taken to ensure instalment payments are made as required; the interest is expensive and non-deductible.
Rosa Maria Iuliano, CA, is a Tax Partner in the Ottawa office of Collins Barrow.
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