Q&A: Tax instalments

Question: I received a notice from the Canada Revenue Agency to pay tax instalments of $6,686 for the 2012 taxes. Do I have to oblige? That is what I paid for 2011 because of pension income splitting with my husband who cashed in an RRSP and some shares last year. The income splitting gave him a refund of $4,000 and I paid $6,686 so we only really paid the difference of $2,686.

Now, for the first time ever, I am the one getting this notice. I am retired and receive a company pension plus CPP, I am not 65 yet. Do I have to pay this instalment? Or can they wait until I file next April? I won’t be pension splitting again. Thanks for any help. – Marjory R.

Gordon Pape answers: No, you don’t have to pay the full $6,686 – there are other options. But you need to be careful. If you choose another option and end up owing tax when you file your return, the CRA may charge interest and penalties.

For starters, the law says that if you owed more than $3,000 on your taxes last year, you must pay instalments in 2012. The fact that you and your husband combined owed less than $3,000 is not a factor since we do not have joint returns in Canada. So you are legally required to make instalment payments. The issue is, how much?

There are three instalment options. The first, which is the one used by the CRA in the notice you received, is called the “no-calculation option”. It assumes that nothing significant will change from year to year and bases the instalment reminder on that premise.

The second is the “prior-year option”. This assumes your 2012 income, credits, etc. will be similar to 2011 but materially different from 2010.

The third, which is the one you may want to look at, is the “current-year option”. In this case, you make your instalments based on what you expect to owe the government for 2012, rather than what your tax bill was in 2011 or 2010. The problem is figuring out how much that will be and making the appropriate payment. You may need the help of an accountant or a software program to do that.

You don’t have to tell the government which option you choose. But you do have to make some payment, unless you calculate that you will owe no taxes at all in 2012. Your first instalment was due on Sept. 15, the second will be payable on Dec. 15.

Of course, the safest move is to pay the full $6,686 in two instalments and claim a refund when you file your return. But if you don’t have the money, make your best estimate as to what you are likely to owe for 2012 and pay that amount.

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