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Individual Tax Series: Taxes Payable: Understanding Your Tax Liability and Managing Payments Effectively
- Rylan Kaliel
- Sep 10
- 9 min read
Updated: Sep 15
Understanding how taxes payable are calculated is essential for Canadian taxpayers looking to manage their tax obligations effectively. Taxes payable refer to the final amount owed to the Canada Revenue Agency (CRA) after all income, deductions, and credits have been accounted for. This blog will explain how taxes are calculated, the different components that affect your tax liability, and strategies for managing tax payments efficiently.
How Are Taxes Payable Calculated?
Taxable Income
As was discussed in our Basics of Individual Taxation blog, the Canadian tax system goes through a series of steps to get to taxes payable. The first step is to determine taxable income, which goes through the following steps.
The importance of taxable income is that it is this income that is multiplied by the appropriate marginal tax rates to determine your taxes payable, before tax credits. This becomes an important consideration in calculating our taxes payable, as this figure will be the last step for deductions until you get to tax credits.
Taxes Payable, Before Tax Credits
As a recap, Canada uses the marginal tax rate system to determine taxes payable, before tax credits, which is essentially as follows (using Alberta as an example for provincial tax rates).
This calculation intends to determine your applicable taxes payable, before tax credits at varying marginal rates. The important thing to note is that as you move your way up these marginal rates this rate is not applied to all of your income, such as if you made $125,000 you would not be taxed at 36.00% on all of your income, instead you would be taxed on your income up to $57,375 at 23.00%, the income after this would be taxed at 28.50% up to $60,000 and so on. As an example, consider the following where you had an income of $125,000.
In the above example, we see that each marginal tax rate bracket gets their own tax applied to it. For example, the first bracket up to $57,375 is taxed at 23.00% for tax of $13,196 and so on. This differs from our previously noted highest marginal tax rate of 36.00%, which would have produced a taxes payable, before tax credits of $20,655. Each bracket will instead get their own tax rate applied to it until we have reached your total income. This results in the actual tax rate being 27.47% ($34,333 / $125,000), rather than the highest marginal tax rate of 36.00%.
Taxes Payable, After-Tax Credits
From our taxes payable, we will deduct our tax credits (see our Basics of Individual Taxation and Basic Personal Amount blog posts for more details on how tax credits are deducted). The general flow from taxable income to taxes payable, after-tax credits is as follows.
As we can see in the above, we have to multiply our taxable income by the marginal tax rates and then deduct our tax credits from this product to determine our taxes payable, after tax-credits. This taxes payable, after-tax credits, is the actual amount of taxes you would pay. It is important to note the several steps required to get to these final taxes payable, after-tax credit, amount.
Taxes Payable
The final step in determining how much taxes you have to pay is to reduce the taxes payable, after-tax credits, for the amount of taxes that have already been paid (this is discussed in more detail in our Withholding Tax blog post, however, the below will provide general information). Taxes you have already paid can come in multiple forms, such as:
Withholdings from employment income
Instalments paid during the year
Foreign taxes paid during the year
Once we have calculated our taxes payable, after-tax credits, we would reduce this amount for these amounts paid. Let’s assume you had $30,000 of taxes payable, after-tax credits, you have $20,000 withheld from your employment income, $8,000 in instalments, and $1,250 in foreign taxes paid during the year. Let’s calculate our actual taxes payable.
From the above, we can see that we calculated our taxes payable, after-tax credits of $30,000, to which we have already paid a large portion of this tax, resulting in our taxes payable of $750. These taxes payable is the actual amount that you would have to pay for the year, as large portions have already been paid.
Taxes Payable and Tax Refunds
The biggest question most people have come tax time is whether they have to pay or are getting a tax refund, or more specifically, how big of a refund they are getting. When determining whether you are paying tax or getting a tax refund it is dependent on your Taxes Payable, whether the amount of tax you’ve already paid through withholdings or other sources is greater than your taxes payable, after-tax credits. Consider the following two situations with only withholdings from employment income.
In Scenario 1, we have insufficient withholdings to cover the taxes payable, after-tax credits. This means that we have a tax payable amount of $2,000, which means you would have to pay this amount. In Scenario 2, we have more withholdings than the taxes payable, after-tax credits, which means that we get a tax refund of $3,000, meaning that our withholdings were more than the amount of tax we had to pay.
Reducing your Taxes and Maximizing your Refund
The most common advice to reduce your taxes and maximize your refund is to try to maximize your deductions and tax credits, such as those discussed in our other blogs. For a quick snapshot of where these deductions and tax credits can come from and how they fit into the picture, see Taxable Income and Taxes Payable, After-Tax Credits above.
The goal to reducing your taxes and maximizing your refund is to understand that the amount of taxes you have to pay is highly contingent on what your taxable income is, that is income less your deductions, and then what tax credits you can claim. Maximizing these amounts can make a huge difference come tax time. Ensuring you set yourself up to be able to claim these deductions early is critical, especially during the tax year, as it can be difficult to claim these deductions after the year is over.
Common Misconceptions
There are a few common misconceptions around taxes payable and tax refunds that are important to highlight when reviewing your own tax situation.
Paying taxes is not a good thing: We hear this a lot, people don’t want to pay taxes come tax time, but the reality is that having to pay taxes at tax time means that you received more money during the year because you didn’t have excess withholdings or larger instalments you made. Paying taxes essentially means you had more cash during the year, so while it hurts to pay, its not actually a bad thing.
I should withhold more taxes on my pay cheques so I get a bigger refund: Similar to the above, having larger withholdings on your employment income reduces your cash received each pay cheque in order to get a larger refund, sometimes more than a year later. While a big refund is nice, this is cash you could have instead received each pay cheque and invested in something that would make you more money rather than waiting on a refund.
I’m self-employed, so my taxes are due June 15 with my return: While your return may be due June 15, your taxes are still due April 30th. If your return is not complete by this date, the best thing you can do is get an estimate of how much you would owe and pay this ahead of April 30th. If amounts are not paid by this date, interest and even penalties can apply.
Not paying my taxes on time is okay, I can wait for my refund next year: While this may seem logical, the issue is that the CRA will charge you interest, and perhaps penalties, on these amounts. The interest alone can be extremely costly and could be costing you thousands if left unchecked for a long time, not to mention significant headaches with calls from the CRA asking for their taxes.
Managing Tax Payments Effectively
To manage tax obligations efficiently, consider the following strategies:
Ensure Correct Withholding Tax: Employees should review T4 deductions and update TD1 forms with employers to avoid excessive refunds or unexpected balances owing.
Make Tax Instalments as Required: Self-employed individuals and investors must prepay taxes through instalments to prevent interest penalties.
Track and Claim All Eligible Deductions: Proper documentation ensures you maximize available deductions and credits, reducing taxes payable.
Plan RRSP Contributions Strategically: Contributing to an RRSP can lower taxable income and reduce overall tax liability.
Use Online CRA Tools: CRA My Account allows taxpayers to monitor their tax situation, make payments, and track refunds or balances owing.
Payment Methods for Taxes Owing
If you owe taxes, the CRA provides multiple payment options:
Online Banking: Pay directly through your financial institution.
CRA My Payment: A secure online payment system available through the CRA website.
Pre-Authorized Debit: Set up automatic payments for tax instalments.
Credit Card or PayPal: Through third-party services approved by the CRA.
Cheque or Money Order: Payable to the Receiver General of Canada.
What Happens If You Don’t Pay on Time? Tax Due Dates, Penalties, and Interest
For persons in Canada, taxes are due on April 30th of each year. This does not change if you are self-employed where you are filing your tax return June 15th, you are still required to pay your taxes no later than April 30th.
Where you do not pay taxes by April 30th, interest can apply to your outstanding taxes. The interest at the time of writing is 7%, compounded daily, based on the amount of taxes you owe. This could result in significant interest accruing on your outstanding balance, money you wouldn’t have otherwise been required to pay.
Where you have an outstanding balance and you do not file your tax return on time you could be subject to penalties. These penalties start at 5% of the outstanding balance and increases by 1% for each full month the return is outstanding up to a total of 12 months, or a maximum penalty of 17%. Where you have repeatedly late-filed your return, the penalty increases to 10% of the outstanding balance and increases by 2% for each full month the return is outstanding up to a total of 20 months or a maximum penalty of 50%.
Let’s consider a situation where a person owed $10,000 in 2021 and $15,000 in 2022. It is now September 30th, 2025 and they have not paid either balance, with it being more than 20 months since the date the amounts were due in 2022. They had not previously failed to file before 2021.
As you can see in the above, our interest and penalties are massive on these overdue balances. The penalty alone increases our amounts owing by 37% and interest another 27%, resulting in us now overpaying our original balance owing by 64%, a significant increase. Given this, ensuring that we pay our taxes on time and file our return can have a significant impact on how much we have to pay in taxes.
Where amounts remain unpaid for an extended period, the CRA can take enforcement measures, such as wage garnishments or freezing assets. You may receive a notice of collection or other similar notices that will indicate that the CRA intends to collect their tax debts and these may illustrate the actions that they may take to collect these amounts. Where you are in this situation, carefully review these letters to understand what the next steps are. Some steps to avoid these situations can be to discuss a payment plan with the CRA to address the amounts owed. Please note, these payment plans may need to be discussed with the CRA for each year to ensure they remain on a payment plan (i.e., if you have a payment plan for 2024 and then file your 2025 tax return, you may have to call the CRA to get a payment plan setup for 2025).
In these situations, it is highly recommended that you discuss potential CRA action, payment plans, and other similar matters with a tax professional to ensure you setup a plan that is most advantageous for your tax and cash flow situation.
Summary
Understanding taxes payable helps Canadian taxpayers manage their obligations proactively and avoid unnecessary penalties. By accurately calculating taxes, using tax credits and deductions effectively, and planning tax payments in advance, you can maintain financial stability and minimize tax-related stress.
Stay tuned for our next blog, where we’ll explore tax withholdings, how these are calculated and how they impact your tax return.
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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