Somewhere around year two or three, this happens to almost every growing business owner I work with. You’ve just scraped together the money to pay last year’s tax bill, probably because you didn’t set it aside as you went, and then a letter arrives from CRA asking you to start paying this year’s tax in advance. In quarterly chunks. Before you’ve even earned it.
It feels like a punishment. It isn’t. It’s what happens when the business starts working. But it is a real cash-flow shock, and it catches people who are doing well and playing catch-up at the same time. I’ve watched a lot of clients go through this phase, and the ones who get to the other side of it tend to grow faster afterwards, because they finally have a system for the money that isn’t theirs. So here’s the system.
When CRA starts asking for instalments
For a sole proprietor filing a T1, the rule is a two-part test. You have to pay instalments in a year if your net tax owing for that year is over the threshold and it was also over the threshold in either of the two years before. At the time of writing the threshold is $3,000 (Quebec has a lower one for the federal part); CRA keeps the current figure on its who has to pay instalments page. So one big year doesn’t trigger it on its own; two does.
You’ll know because CRA sends an instalment reminder (form INNS1) twice a year: one in February covering the March and June payments, one in August covering September and December. The reminder suggests an amount, usually based on what you owed last year.
The four dates are March 15, June 15, September 15 and December 15. Put them in your calendar the day the reminder arrives, as repeating events at the start of each of those months, so the money is moved before the 15th rather than found on the 14th.
What it costs to ignore the letter
Nothing, if you end up owing nothing at tax time. If you do owe, CRA charges instalment interest on each payment you didn’t make, from the day it was due until your balance-due date, compounded daily at the prescribed rate. That rate is reset every quarter and has been running well above what a savings account pays; the current figure is on CRA’s prescribed interest rates page. Skip the June payment and the interest on it runs for roughly ten months.
On a modest instalment that’s a couple of hundred dollars of interest. On a larger one it’s more, and once your instalment interest for the year passes a set amount (currently $1,000) there’s a penalty stacked on top — the rules are on CRA’s instalment interest and penalty page. It’s an expensive way to borrow, and it’s completely avoidable.
Here’s the part the reminder doesn’t spell out: if you pay the amounts CRA suggests, on the dates they give you, you will not be charged instalment interest even if you turn out to owe more than that when you file. The suggested amounts are the safe harbour. Paying them is the lowest-stress option.
How much to set aside if you’re not on instalments yet
This is the habit that makes the letter a non-event when it comes. The number depends on how your business is set up.
Sole proprietors. For clients under about $100,000 in revenue, my rule of thumb: a service business sets aside 25 to 30% of what comes in; a product business 20 to 25%, because cost of goods is already eating part of it. That’s for income tax only — most people in that range are sitting at roughly a 25% rate. Past $100,000 the maths changes and you want a tax professional to run your actual number rather than a percentage.
Corporations. I have my incorporated clients set aside about 15% of profit for corporate tax. The combined federal and provincial small-business rate varies by province and sits below that, so 15% leaves a cushion. Corporations also get their own instalment schedule from CRA, on dates tied to your fiscal year-end rather than the March-to-December calendar above — more on that below.
Either way, GST/HST is separate. It comes off the top before any of the above and goes into its own account. You won’t remit all of it, because you’ll claim back the GST you paid on expenses, but it was never your money and CRA is far less patient about sales tax than income tax. Over-saving GST is a buffer. Under-saving it is a crisis.
The pro tip: one tax savings account, funded monthly
We run a version of Profit First with clients. Every month, a set share of GST collected and a set share of profit moves into a tax savings account. One account for both is fine as long as you know what’s in it for what; if that bothers you, open two. Business savings accounts are cheap and most banks let you attach them to your existing business chequing in minutes.
The point is that at instalment time, or year-end, the money is already sitting there. No panic, no scramble, no borrowing from next quarter to pay last year. Going into a new year with a tax bill you didn’t plan for is one of the worst feelings in business, and it’s the single most preventable one.
Corporations and GST registrants
If you’re incorporated, the T2 has its own instalment rules: CRA tells you the schedule and the amounts, and the dates are tied to your fiscal year-end rather than the March-to-December calendar above. GST/HST annual filers past a certain net tax also pay quarterly instalments. Different thresholds, different dates. If you’ve received either kind of notice and aren’t sure what it’s asking, that’s a conversation about your specific numbers, not a blog post.
Not sure what you’ll owe?
That’s the real question, and a clean set of books is the only way to answer it before CRA does. The Books Check-Up goes through your bookkeeping the way a reviewer would, tells you what’s solid and what isn’t, and gives you a recorded video walkthrough of what to fix, within 7 to 10 business days.
If the instalment letter has already landed and you’re not sure what to do with it, get in touch. We’ll sort out what it means for you.