Managing tax instalments can be a tricky business, but with a few clever strategies, you can keep more cash in your pocket. Here's a breakdown of how to navigate the tax system and make the most of your hard-earned money.
The Rules of the Game
The Canada Revenue Agency (CRA) will send you a reminder if you need to make tax instalments, but don't just pay the suggested amount. It's a suggestion based on one of three methods allowed by tax law. Many people pay the suggested amount months early, which can be a waste of money.
You have to make quarterly tax instalments if your net tax owing exceeds $3,000 ($1,800 for Quebec residents) in the current year and either of the two preceding years. Instalments are normally due on March 15, June 15, Sept. 15 and Dec. 15.
The Three Methods
- No-calculation option: Pay the amounts shown on CRA's reminder (based on prior two years). This generally avoids instalment interest.
- Prior-year option: Instalments are based on last year's tax bill.
- Current-year option: Estimate this year's tax and base instalments on that amount. This can significantly reduce instalments if income has fallen.
Strategies for Keeping Cash in Your Pocket
- Lower income ahead: If you expect lower income this year, use the current-year option. This applies to retirees, business owners with declining profits, employees with one-time bonuses, or investors with large capital gains unlikely to recur.
- Count deductions and credits: Factor in registered retirement savings plan contributions, donations, business or rental losses, childcare, moving, medical, interest, and other expenses. This can reduce remaining instalments.
- Harvest capital losses: Realize capital losses before year-end to offset gains, reduce tax owing, and justify smaller instalment payments.
- Increase tax withholding: Ask your employer, pension administrator, or registered retirement income fund carrier to withhold additional tax. This is treated as paid evenly throughout the year.
- Alternate dividend years: Business owners can pay approximately two years' worth of dividends every second year. This can reduce instalments in lower-tax years and use the prior-year method in higher-tax years.
- Review midyear: Adjust your instalment estimate in August to avoid paying tax too early or incurring unnecessary interest.
The Bottom Line
By carefully considering these strategies, you can keep more cash in your pocket and make the most of your tax situation. Remember, it's not about avoiding paying tax, but about avoiding paying before you have to. Good cash-flow planning can generate significant additional after-tax investment income over time.
