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Individual Tax Series: Tax Instalments: Understanding and Managing Quarterly Tax Payments
- Rylan Kaliel
- Sep 23
- 11 min read
Updated: Oct 4
For many Canadian taxpayers, tax instalments are an essential part of managing tax obligations efficiently. Individuals who do not have sufficient tax withheld at source—such as self-employed individuals, investors, and those receiving rental or pension income—may be required to make periodic payments throughout the year. This blog will explain what tax instalments are, who needs to pay them, how they are calculated, and best practices for avoiding penalties.
What Are Tax Instalments?
Tax instalments are periodic prepayments of income tax made throughout the year to avoid a large tax bill at filing time. The Canada Revenue Agency (CRA) requires instalment payments if your tax owing exceeds a certain threshold and is not automatically deducted from your income.
Who Needs to Pay Tax Instalments?
You may need to make tax instalments if:
Your total tax owing for the previous year exceeded $3,000 ($1,800 for Quebec residents) and was not covered by payroll deductions.
Your net tax owing in the current year is expected to exceed the instalment threshold.
You earn income from self-employment, investments, rental properties, or pension income where insufficient tax is withheld.
How Are Tax Instalments Calculated?
The CRA provides instalment reminders with suggested payment amounts based on one of three methods:
No Calculation Method: Uses the amounts from your most recent tax return.
Prior-Year Method: Bases instalments on your total tax owing from the previous year.
Current-Year Method: Estimates tax payable for the current year and divides it into instalments.
Payments are typically due on the following dates:
March 15
June 15
September 15
December 15
Failing to pay the required amounts may result in interest and penalties, which will be discussed in How Do Interest and Penalties Arise?.
The number of instalments you are required to pay can vary and is often determined as the lessor of the above three options, while the dates typically remain the same. There is some risk with the current-year option, as it is often an estimate and if the actual current-year taxes payable ends up being higher than your estimate you could end up having to pay instalment interest and penalties (discussed more below).
Let’s take a quick look at each of these options in action. Let’s assume the following:
Your 2024 net taxes payable was $5,000.
Your 2025 net taxes payable was $8,000.
Your estimated 2026 net taxes payable was $4,000.
In the above we note that the total amounts under the no-calculation and prior-year option are the same, however, they get there in different ways. Under the no-calculation option, we take ¼ of the 2024 taxes payable for the first two periods, then the following two periods are effectively calculated as follows:
(2025 taxes payable – instalments made to date) / 2
(8,000 – 2,500) /2 = 2,750This calculation is done under the no-calculation option to ensure that the instalments for 2026 equals the 2025 taxes payable amount. Similarly, the prior-year option also ends up with the same amount of taxes payable as 2025, however, it does this by simply taking ¼ of the 2025 taxes payable across all four periods. Under both of these methods, the 2027 payment remains the same as ¼ of the 2025 taxes payable.
The only major difference is in the current year option, which is simply ¼ of the 2026 expected taxes payable. In this case the instalments are significantly lower, as our estimate for 2026 taxes payable is lower then the other two years actual taxes payable.
It should be noted that you can select the method that requires you to pay the lowest amount of taxes payable, however, the current year option does have risks. As will be discussed more in How Do Interest and Penalties Arise?, where you select the current year option and you do not make instalments large enough to cover the instalments required under the lower of the other two methods, you may be charged interest and penalties. We would typically only advise that the current year option be selected only where we are certain we can trust our estimate for the 2026 year.
How Do Interest and Penalties on Instalments Arise?
Interest and penalties on instalments can arise where the entire amount of the instalments were not paid, either in part or in full. For example, if you were required to pay instalments of $1,000 but only paid $500, instalment interest can arise. Similarly, penalties can arise, however, they are based on the amount of instalment interest that arises.
Instalment Interest
Starting with interest, instalment interest is only charged where all of the following apply:
You are required to pay by instalments in 2025
You receive an instalment reminder in 2025 that shows an amount to pay
You did not make any of your instalment payments, paid late, or paid less than what you had to pay
Under the first requirement, your previous years return will indicate if you are required to pay instalments, which was noted in Who Needs to Pay Tax Instalments? as having your total tax owing for the previous year exceeded $3,000 ($1,800 for Quebec residents). Your tax return will typically note that you are required to pay these instalments and give you a schedule for the amount of instalments you are required to pay.
The second requirement requires that the CRA send you an instalment reminder, typically sent through your CRA My Account, but can also be sent via mail, depending on what you request on your tax return or in discussions with the CRA. It is prudent to monitor for these reminders to confirm the instalment amount the CRA is requesting be paid. Typically, these reminders are sent out in the following months:
February reminder: Sent for the March and June payments
August reminder: Sent for the September and December payments
The third requirements requires that interest will be charged where you do not pay your instalments, paid late, or paid less than what you had to pay you. Effectively, if you miss a payment, pay it late (even a day), or don’t pay enough they can charge you interest. This requirement is important, as it is connected to how much interest will be charged on your instalments.
Interest is calculated based on the amounts outstanding at the prescribed interest rate for the number of days the instalments are outstanding. Note, the prescribed interest rates change quarterly and are published by the CRA for each quarter, often ahead of the quarter starting (i.e., these may be published in September for October to December interest rates). Not only is this interest charged on the instalment balance, but also on any overdue interest or penalties, so simply paying the instalment may not be enough.
Let’s look at an example. Let’s assume you missed an instalment of $25,000, which had a prescribed rate of interest of 7% and was left outstanding for 270 days. Let’s calculate the instalment interest.
As we can see, on our 25,000 outstanding, we accrue instalment interest of $1,328.49, which increase our total payable by 5.31%. Not managing your instalment payments can get expensive fast, especially when we factor in penalties.
Please note, the instalment interest calculation is a unique calculation as is it is compounded daily. This changes the formula from simply taking the 7% interest prorated for the year, known as simple interest, to having to calculate the interest on a daily basis, known as compound interest. To illustrate, note how the two are calculated and what the difference would be, assuming a full year’s worth of interest, assuming our $25,000 is the amount outstanding.
Simple interest
Simple interest = amount outstanding interest rate / 365 days
Simple interest = 25,000 7% / 365 365
Simple interest = $1,750
Yearly rate of interest is 7%Compound interest
Compound interest = amount outstanding * [(1 + interest rate / 365) ^ 365 – 1]
Compound interest = $25,000 * [(1 + 7% / 365) ^ 365 – 1]
Compound interest = $1,812.52
Yearly rate of interest is 7.25%You’ll note that under the compound interest method, we actually have a higher rate of interest than under simple interest. This is because there is interest being charged on interest. In this case, the first day of interest may be $4.79 of interest each day, but by the end of month this interest increases to $4.82 per day, slowly ticking upward. Given this, it is important to understand that the longer this is left outstanding the more interest you are paying each day. Now let’s look into how penalties play into this calculation.
Penalties
Penalties are calculated based on the amount of instalment interest you incur, essentially, if you have instalment interest large enough penalties may arise. Essentially, this is calculated as follows:
Penalty = (actual interest – penalty floor) / 2
Penalty floor = greater of:
$1,000; or
25% of instalment interest, assuming no instalments were madeThis calculation can be confusing, as the penalty floor is odd to manage. To make this easier to understand, let’s continue with our example. We have $1,328.49 of instalment interest. Let’s calculate our penalty, starting with the penalty floor.
In the above, we note that 25% of our instalment interest is only $332.12, which is less than $1,000, so we use the flat rate of $1,000 instead. This benefits us, as we’ll see in our calculation, as having a higher floor reduces the penalty we would incur. Now let’s calculate the actual penalty.
As we can see in the above, we reduce our instalment interest for the penalty floor to get a reduced instalment interest. It is this reduced instalment interest that is reduced by ½ to get our penalty. Given this, a higher penalty floor has benefited us by reducing the amount that gets the ½ reduction factor and thus the overall penalty is reduced.
Interest and Penalties
Now let’s look at a more comprehensive situation, one which combined interest and penalties and also has interest greater than the default $1,000 penalty floor. This is where some of the instalments were made during the year, but not all of them. Let’s assume that your instalments for the year were quarterly instalments of $75,000, of which you made one payment, but not all of them, or better put, you had the following instalment schedule and payments.
From this schedule, let’s calculate two values, first the actual instalment interest at a prescribed rate of 7%.
In the above calculation, we note how interest accrues over time, with the first date we note instalment interest arising a t September 15, 2026, as this is the first date after an amount is noted after being outstanding. This instalment interest increases each period after. Now let’s look at the instalment interest if we had not paid any instalment during the year.
In the above calculation, we now see how much our maximum instalment interest could have been. This is an important calculation for the penalty, as it will impact the penalty floor, which we will calculate now.
As we can see, our instalment interest floor is now higher than our flat rate, so we go with the instalment interest floor, instead of the flat rate, for our penalty floor. Now let’s see how this impacts our penalty calculation.
We now see that we take our actual instalment interest, instead of our maximum instalment interest, and reduce this by our penalty floor. It is this amount that gets reduced by ½ to calculate our instalment penalty. As such, knowing both the maximum instalment interest and actual instalment interest is crucial in calculating our instalment penalty. Finally, let’s summarize the results and see what amounts are owed to the CRA.
We now can note that our original owing of $225,000 has increased to $231,099.44, an increase of $6,099.44 or 2.71%. This may not seem like a large increase, but it should be noted that these were calculated on less than half a year of missed instalments, with the balance increasing over the year. If this were left outstanding even longer the balance could increase significantly.
Further, as was discussed in our Taxes Payable blog post, under What Happens If you Don’t Pay on Time? Tax Due Dates, Penalties, and Interest, there could be significant penalties and interest arising from not filing your return and not even knowing what instalments could be required. The combination of these could be extremely costly, combining the cost of not filing your return and not making the required instalments adds up very quickly.
Given these risks, it is highly recommended that you ensure that both your return is filed on time, amounts owing from the return are paid, and instalments are paid.
Reducing Interest and Penalties
There can be methods to reduce interest and penalties where an instalment is not made. The solution is to make a larger payment in the future, which is known as contra interest. The idea is simple, if you missed a payment, you have to pay interest, if you make a larger payment, above and beyond what instalments you owed at that time, you should be paid interest on the excess payment. This excess payment interest offsets the original interest on a missed payment.
Let’s look at an example of this, let’s assume the following instalment schedule.
Let’s assume that you missed the payment for March 15, 2026 and it is now coming up on June 15, 2026. In order to offset the missed March 15, 2026 payment, you would have to pay the March 15, 2026 payment plus an increased amount for contra interest. In this case, you’d have to effectively double the March 15, 2026 payment and also pay the June 15, 2026 payment, as noted below.
In the above, we overpay the June 15, 2026 payment by making both the June 15, 2026 payment plus double the March 15, 2026 payment. This leaves us with an amount owing from the CRA of $75,000, of which we will earn contra interest on. The goal here will be to generate enough contra interest to offset the full interest that accrued between March 15, 2026. Because of this, we can avoid making a payment in September 15, 2026, as the interest accruing between March 15, 2026 and June 15, 2026 should be offset by the interest earned between June 15, 2026 and September 15, 2026. Let’s look now at the interest calculations to illustrate this.
As you’ll note in the above, the instalment interest at June 15, 2026 is directly offset by the interest earned at September 15, 2026. This results in no actual interest being owed for the year. Note that in this example we used two simple amounts and simple dates, but often times the days between the period can vary, the payments missed could be multiple periods (i.e. missed both March and June payment), interest rates could vary, or any number of other things could arise which can make this calculation extremely challenging. Given this, it is highly recommended that if you’d like to use contra interest to reduce your instalment interest you discuss the matter with a tax professional.
Another thing to note is that after the contra interest has been applied to the instalment interest the rate of interest you may earn can change. Contra interest is given a benefit in that it is earned at the same rate as other overdue balances, however, after this instalment interest is eliminated, the rate may reduce to the interest rate given to overpayments, which as at the fourth quarter of 2025 varies between 3% to 5%. Further, you may not even earn this interest rate, in fact, you may get no interest, as this rate is only given on overpayments, which can be tricky to determine. Given this, it is important to discuss this with a tax professional to better understand how much interest you may earn.
How to Make Instalment Payments
You can make instalment payments using the following methods:
Online Banking: Through your financial institution.
CRA My Payment: Direct online payment via CRA’s website.
Pre-Authorized Debit: Set up automatic payments through CRA My Account.
Cheque or Money Order: Payable to the Receiver General of Canada.
Please review the CRA’s website for details on each of these methods.
Strategies for Managing Tax Instalments Effectively
To avoid interest and penalties and ensure smooth tax payments:
Estimate Taxes Early: Use CRA’s tax calculators or a tax professional to estimate taxes payable.
Set Up Automatic Payments: Pre-authorized debits prevent missed deadlines.
Adjust Payments Based on Income Changes: If income fluctuates, adjust instalments accordingly.
Keep Track of Due Dates: Mark instalment deadlines in your calendar to avoid late payments.
As was discussed in How Are Tax Instalments Calculated? there are specific rules around the calculation of your instalments and where instalment interest and penalties can be charged. It is important to be aware of these rules and pay the appropriate amounts.
Summary
Tax instalments are crucial for individuals with income sources that do not have tax withheld at source. By understanding who needs to pay, how amounts are calculated, and best practices for making payments, taxpayers can avoid penalties, reduce financial stress, and better manage their tax obligations throughout the year.
Stay tuned for our next blog, where we will tax filing basics, how to file your return and what to know both before and as you file.
KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.
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