With the 2020 tax season now a wrap for the majority of Canadians, we wanted to share the answers to some of the most frequently asked questions we receive post-tax season:
Do I have to pay my personal tax in instalments?
June 15th is the next personal tax instalment date, so this is a timely question. Short answer – if you earn income that doesn’t have any/enough tax withheld (typically resulting from self-employment income, income from rental properties, or if an employer doesn’t withhold enough income tax from your paycheques) AND your net tax owing for both the previous and current tax year exceeds $3000 ($1,800 for Quebec residents), you have to pay personal income tax by quarterly instalments.
The CRA due dates for instalment payments are:
- March 15th
- June 15th
- September 15th
- December 15th
How to Calculate Instalment Amounts
There are three methods you can use to calculate your instalment tax payments. You can:
- pay the amount indicated on your instalment reminder form,
- determine what you owe this year using your net tax from the previous tax year, or
- calculate the instalments based solely on this year’s tax information.
Note: if you opt to use one of the latter methods, be careful not to underestimate your quarterly payments, as you will be charged interest on any underpayment.
Interest and Penalties
If you are required to pay quarterly income tax instalments and miss a payment, make a late payment, or pay less than the required amount, the CRA will charge you substantial instalment interest. Instalment interest is compounded daily at a prescribed interest rate—currently 5%. There may also be a significant penalty if your instalment interest exceeds $1,000. Additional details plus an example calculation can be found on this page of the Government of Canada website.
Tip: you can reduce or eliminate instalment interest and penalties by overpaying your next instalment payment, or by paying your next instalment early. This allows you to earn instalment credit interest which, although not refundable, will be applied against any interest charges on late payments for the same tax year.
Should I make an RRSP contribution?
We get asked this question early in the year as the RRSP contribution deadline approaches. It is often triggered by an income tax refund or a tax planning conversation. If the taxpayer asking the question hasn’t committed to an RRSP as a long-term retirement savings vehicle, the answer we usually give is “no.” Why? Because the purpose of an RRSP is to set aside funds that you can draw from after you retire, not to serve as a short-term savings or tax planning vehicle. Either commit to an RRSP or don’t commit to an RRSP, but don’t waffle. In our view, there is no in between.
If you’re not prepared to commit to an RRSP as a long-term retirement savings vehicle, consider contributing to a TFSA instead. Since TFSA withdrawals aren’t subject to tax, they are a great option for saving for shorter-term goals and your rainy-day funds (car repairs, furnace replacement, children’s braces etc.)
Can I dispute a CRA Assessment?
Short answer – yes. If you want to dispute a Notice of Assessment (or Reassessment), the first step is for you (or your authorized representative) to contact the CRA using the phone number provided on your Notice. The call may be able to clear up any miscommunication or error, or allow you to provide further information to quickly address the issue.
If the phone call doesn’t resolve the issue to your satisfaction, you are able to file a formal Notice of Objection with the CRA within 90 days from the date of your Assessment Notice. The objection can be filed on your behalf by an authorized representative, or you can file it yourself using the CRA’s My Account online portal, by mail, or by delivering it in person to a tax services office or tax centre.
We strongly recommend that you speak with an experienced tax professional before filing an objection with the CRA, as each situation is unique and will have numerous variables to consider. It’s also important to note that—depending on the level of complexity—it can take anywhere from a few months to well over a year for the CRA to process and resolve a formal income tax objection. If you don’t have a financial representative who can discuss your options with you, you may want to visit the CRA’s Income tax objection decision tool to help determine if there is an alternate way to resolve your dispute.
If you do file a Notice of Objection, be prepared to provide a clear explanation as to why you disagree with the (Re)Assessment, and ensure that you include all relevant supporting documentation.
What is a Request for Information?
If you receive a Request for Information from the CRA, don’t panic. It isn’t an audit. A Request for Information is simply that—a request for information, usually in the form of supporting documentation (often receipts) for a credit or deduction that was included on your tax return. Common information requests are for home office expense claims, tuition receipts, moving expenses, charitable donations, and medical expenses—as these are items that can’t easily be cross-referenced to your social insurance number.
If you have a CRA My Account, you can scan the required supporting documentation and submit it online. Otherwise, the requested receipts will need to be sent to the CRA by mail or fax.
It’s important that you respond promptly to a Request for Information. If you choose to ignore the request, or don’t respond by the due date provided, you will be reassessed and your claim for that specific credit or deduction will be denied. It will take many more weeks (12+) to resolve the issue than to respond within 30 days of the request.
Note: If you need more time to gather requested information, you can call the tax centre at the number provided in your letter and request an extension.
S+C Partners is committed to helping you
Our dedicated tax team is here to support you. Please call us at 905-821-9215 or email us at firstname.lastname@example.org if you have any questions or require any assistance.