The Breadcrumb Trail Connects Tax Personal Finance
Jamie Golombek: You could be hit with outstanding interest at the highest rate we’ve seen in more than 15 years
Ignoring the upcoming March 15 income tax installment deadline will be too costly for higher interest rates. Photo by Getty Images / iStockphoto
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Beware the Ides of March.
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That’s especially true this March 15 if you’re one of the estimated two million Canadians who must pay taxes in installments. The next installment date is when the first of four payments is due for the 2023 tax year. And because of the recent dramatic increase in interest rates, you don’t want to delay, or you could get hit with outstanding interest at the highest rate we’ve seen in more than 15 years.
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But before looking at how the latest rate hike could affect late or missing tax payments, let’s briefly review our tax installment system, which covers each of the three methods for calculating your required quarterly installments.
Under the Income Tax Act, quarterly tax installments are required for this tax year if your balance will exceed $3,000 ($1,800 for Quebec tax filers) for 2023 and $3,000 ($1,800 for Quebec) in 2022 or 2021 Was.
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Three options can be used to determine how much you need to pay each quarter: the no-calculation option, the prior-year option, and the current-year option. Taxpayers are free to choose the option that results in the lowest payment. But if you choose to pay less than the no-calculate option, you could face installment interest, and possibly even penalties, if your payments are made too little or late.
Under the no-calculation option, the Canada Revenue Agency calculates your March 2023 and June 2023 installments based on 25 per cent of the balance due from your 2021 assessment return. Then the installments of September 15 and December 15, 2023 will be counted as deductions from your 2022 return as 50 per cent of the outstanding balance for the March and June installments already paid.
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The prior-year option bases the calculation on the previous year’s balance only, and your four 2023 installments are each one-fourth of the 2022 balance. This option is best if your 2023 income, deductions and credits are similar to 2022 but significantly less than those in 2021, perhaps because you sold some securities in 2021 and reported a larger capital gain that year.
Finally, under the current year method, you can choose to make this year’s installments based on the amount of estimated tax due for this year (2023), and pay one-fourth of the estimated amount on each installment date. This option is useful when your income in 2023 will be much less than that in 2022. But it’s also the riskiest method because if you’re wrong, you could be charged installment interest, compounded daily at the specified interest rate, and an installment penalty if the installment interest exceeds $1,000.
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The reason why there is more concern this year than in recent memory about missing or missing the March 15 installment is that the fixed rate is due to rise again on April 1. The fixed rate is determined quarterly and tied directly to the yield on the Government of Canada three-month Treasury bill, but with a lag.
The calculation is based on a formula in the Income Tax Regulations, and takes the simple average of three-month Treasury Bills for the first month of the preceding quarter, rounded up to the next highest whole percentage point (if not already a whole number). .
The fixed rate is due to rise again on April 1. Photo by Brent Levine/Bloomberg
To calculate the rate for the upcoming quarter (April 1 through June 30, 2023), you look at the first month of the current quarter (January 2023) and average the three-month T-bill yield, which is 4.3563 per cent ( January 5) and 4.4456 percent (January 19). This averages out to 4.401 percent, but when rounded to the nearest whole percentage point, we get five percent for the new fixed rate for the second quarter of 2023. Compare this to the historically low rate of one percent between July 1, 2020 and June 30, 2022.
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However, there are three fixed rates: the base rate, the rate charged for tax refunds and the rate charged for late taxes paid. The base rate, which is the fixed rate, and which will increase to five per cent (from four per cent) on April 1, applies to taxable benefits to employees and shareholders, low-interest loans and other related-party transactions.
The tax refund rate is two percentage points above the base rate, meaning if you owe money to the Canada Revenue Agency, the interest rate will be seven percent starting April 1. Note, however, that filing your 2022 tax return early won’t necessarily get you that rate on your refund, since the CRA only pays refund interest on amounts you owe after May 30, assuming you filed by the deadline. filed within.
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Finally, if you owe money to the CRA, which can happen if you haven’t paid the amount owed on your 2022 tax return in full by May 1, 2023, or if you’re late on any of your quarterly installments, If you are delaying or missing one, the CRA fee rate is actually a full four percentage points higher than the base rate. It raises the interest rate on tax loans, penalties, insufficient installments, unpaid income tax, Canada Pension Plan contributions and Employment Insurance premiums to nine per cent as of April 1.
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Keep in mind that this interest is compounded daily, and is not tax deductible. For example, if you’re a Newfoundland and Labrador resident and in the highest 2023 tax bracket of 55 percent, that means you’ll need to find an investment that earns a guaranteed, pre-tax rate of return of 20 percent. Better off paying off your tax debt.
So before you think twice about skipping the upcoming March 15 installment deadline, keep in mind that there could be no better use of those money.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director of Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected]
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