What CRA Tax Instalments Actually Are
If you’ve ever gotten a letter from the CRA telling you to send in a chunk of money you weren’t expecting, there’s a good chance it was an instalment reminder. Tax instalments are periodic payments toward the tax you’ll owe for the current year, paid before you file your return rather than all at once in April (or June, if you’re self-employed).
The idea makes sense from the CRA’s side: if you owe more than a certain amount every year, it would rather collect it in pieces as the year goes than wait twelve months and hand you one enormous bill. For a lot of Canadian small business owners, especially sole proprietors who don’t have tax withheld from a paycheque, this is the first time instalments come up. One year you owe $4,500 at tax time, and the next thing you know, the CRA wants quarterly payments going forward.
This catches people off guard more often than it should. Nobody explains instalments when you register your business, so the first anyone hears of them is usually a reminder notice arriving in the mail, sometimes for an amount that feels arbitrary. It isn’t arbitrary. It’s based on a formula, and once you understand the formula, the notices stop being confusing.
Who Actually Has to Pay Them
For individuals, including sole proprietors and partners in a partnership, the CRA requires instalments if your net tax owing was more than $3,000 in the current year and in either of the two previous years ($1,800 if you live in Quebec, because of the separate provincial tax collection system there). Net tax owing means the tax you had to pay after subtracting anything already withheld or credited, not your total tax bill for the year.
Corporations follow a similar $3,000 threshold, but the mechanics differ. Most small Canadian-controlled private corporations pay quarterly if they qualify (a clean compliance history, taxable income under a set limit, no large associated group of companies), and monthly if they don’t. If you’re incorporated and unsure which bucket you’re in, your accountant can check in about five minutes, and it’s worth asking before an instalment date sneaks up on you.
Getting an instalment reminder in the mail doesn’t mean you’re locked into paying exactly that amount. You can choose a different calculation method if it results in a lower total, as long as you aren’t underestimating in a way that racks up interest.
How the Three Calculation Methods Work
The CRA gives you three ways to figure out what to pay, and picking the right one can save real money if your income swings much from year to year.
| Method | How it works | Best for |
|---|---|---|
| No-calculation option | CRA sends reminder amounts based on your prior-year (or prior-two-year) tax owing, split into four payments | Businesses with steady or growing income |
| Prior-year option | You base this year’s instalments entirely on last year’s actual net tax owing | Income that dropped noticeably from last year |
| Current-year option | You estimate this year’s tax owing yourself and pay a quarter of it each instalment date | A clear, well-supported drop in income you’re confident about |
Most bookkeepers default clients to the no-calculation option because it’s the safest: as long as you pay the amount the CRA tells you to, you won’t be charged instalment interest even if it later turns out you owed more for the year. Estimate on your own with the current-year option and guess low, though, and you’re on the hook for interest calculated as if you’d underpaid all along.
Due Dates and What Happens If You Miss One
For individuals and most sole proprietors, instalments are due four times a year: March 15, June 15, September 15, and December 15. Corporations on quarterly instalments follow their own fiscal quarter, and those on monthly instalments pay on the last day of every month instead.
Miss a payment or pay too little, and the CRA charges instalment interest, compounded daily, at a prescribed rate it resets every quarter. That rate has bounced around in the high single digits over the past couple of years, which adds up fast on a missed $4,000 payment sitting unpaid for a few months. There’s also a lesser-known instalment penalty layered on top of the interest once the shortfall is large enough, so this isn’t a pay-it-whenever situation.
Instalment interest isn’t deductible the way loan interest might be for other business costs. It’s simply money leaving your account for no benefit, so treat instalment dates with the same seriousness as payroll or rent.
Yes, GST/HST Can Come With Instalments Too
Income tax isn’t the only thing that can land you on an instalment schedule. If you file GST/HST annually (common for smaller registrants who chose the annual option instead of monthly or quarterly filing) and your net tax owing was over $3,000 the year before, the CRA expects quarterly GST/HST instalments as well. This surprises a lot of owners who assumed instalments were strictly an income tax thing.
We go through how GST/HST filing frequency and thresholds actually work in our guide to GST and HST for small businesses. Worth a read before assuming your filing frequency and your instalment obligations are unrelated, because they’re often the same underlying threshold showing up twice.
Planning Your Cash Flow Around Instalments
The businesses that get caught off guard by instalments are almost always the ones treating tax as a once-a-year event instead of a recurring line item. If you know a $2,500 payment is coming on September 15, that isn’t a surprise anymore, it’s a scheduling problem. Set aside a percentage of revenue every month (many bookkeepers suggest somewhere around 25 to 30 percent for a typical incorporated small business, though your actual rate depends heavily on your structure and margins) into a separate account so the money is already sitting there when the date arrives.
This is the same discipline behind avoiding the trap described in our piece on cash flow versus profit: a healthy profit and loss statement doesn’t mean the cash is actually sitting in your account on the day you need to send it to the CRA. A rolling cash flow forecast makes instalment dates visible weeks in advance instead of the night before. That’s part of why Nikmani’s Gold plan builds a 12-week forecast around dates like these, so a quarterly tax payment shows up as a planned dip on the chart instead of an emergency.
Getting Ahead of It
Instalments aren’t a penalty for running a successful business, even though the first reminder notice can feel that way. They’re just the CRA spreading out a bill you were always going to owe, four payments instead of one. Once you know your threshold, your due dates, and which calculation method actually fits your numbers, the whole thing turns into routine bookkeeping rather than an annual scramble.
- Check whether your net tax owing crossed $3,000 in either of the past two years.
- Confirm your filing frequency for GST/HST as well as income tax.
- Mark all four due dates on your calendar the same day you file your return.
- Set aside money monthly rather than scrambling the week before a due date.
If you’d rather have the dates and the cash flow math tracked automatically instead of in a spreadsheet you update twice a year, take a look at Nikmani’s plans. Ask your accountant which instalment method fits your specific numbers. The scheduling and the setting-aside part is something software can carry for you.