When does a corporation have to pay tax instalments?

The $3,000 threshold that triggers instalments

A corporation has to make instalment payments when its net tax payable, federal and provincial combined, exceeds $3,000 in the current tax year and in one of the two immediately preceding years. If tax payable was $3,000 or less in either the current year or the relevant prior year, no instalments are required and the full balance can simply be paid by the balance-due day. This is a two-year look-back test, not just a current-year one, so a corporation cannot assume it is exempt just because this year happens to be a slow one.

Monthly instalments: the default

Most corporations pay monthly instalments, due on the last day of each month in the tax year. The CRA offers a few ways to calculate the amount: base it on an estimate of the current year’s tax, base it on one-twelfth of last year’s tax with a true-up at year end, or use a blended approach based on the two preceding years. Choosing the method that best matches how predictable your corporation’s income is from year to year avoids both underpayment interest and unnecessarily large instalments sitting with the CRA before they are due.

The current-year option bases instalments on your best estimate of this year’s tax, which minimizes instalments in a declining-profit year but risks interest if the estimate turns out too low. The prior-year option bases instalments on last year’s tax payable divided into equal monthly amounts, which is simple and avoids any estimate, but can mean paying more than necessary if this year is weaker than last. The second-preceding-year option uses two months based on the tax payable from two years ago, then adjusts the remaining instalments to true up to last year’s actual tax payable; the CRA generally will not charge instalment interest if you correctly follow whichever of these three methods produces the lowest instalments, even if that method turns out to underpay compared to the year’s actual final tax.

Quarterly instalments for eligible small CCPCs

A Canadian-controlled private corporation can pay quarterly instead of monthly if it meets several conditions at once: a perfect compliance history with no late instalments, returns, or amounts owing in the preceding 12 months, taxable capital employed in Canada under $10 million for the associated group, and taxable income that keeps it within the small business limit. This is a meaningful cash flow advantage for a qualifying small business, since it frees up cash for three months at a time instead of one, but a single late filing can knock a corporation out of eligibility for future years.

The $10 million taxable capital threshold for quarterly eligibility, and the small business limit itself, are measured on an associated group basis, not just for the single corporation making the payment. A group of two or three corporations under common ownership, each individually small, can still be pushed out of quarterly eligibility once their taxable capital or income is combined, which is worth checking before assuming a newly incorporated second company keeps quarterly instalments available.

What happens if instalments are missed or short

Underpaid or late instalments accrue interest at the CRA’s prescribed rate from the date each instalment was due, calculated on the shortfall for the actual number of days it was outstanding. If the interest charge for the year is large enough, a separate instalment penalty can also apply on top of the interest. Because the calculation compares what should have been paid under each available method, it is worth checking which method produces the lowest instalment requirement for your specific numbers before the year even starts, and only the lowest of the three results is used to assess whether interest is owing.

Instalments due monthly or quarterly compete with payroll remittances, GST/HST payments, and ordinary operating cash needs for the same bank balance. A corporation that budgets for instalments only when a CRA reminder or interest notice arrives is managing this reactively rather than as part of normal cash flow planning, and a mid-year drop in profit does not automatically reduce instalments already calculated on a prior-year basis unless the corporation deliberately switches to the current-year method.

The first-year exemption, and its limit

A brand-new corporation generally owes no instalments in its very first tax year, since instalments are based on tax payable in the current or prior years, and there is no prior year to reference yet. This does not mean the first year’s tax is free of a deadline; the full balance is still due by the corporation’s balance-due day, typically two or three months after year end depending on whether it qualifies for the small business rate. Instalments simply have not started yet, and they typically begin partway through the second tax year once a full prior year of tax payable exists to measure against. New owners sometimes mistake this grace period for a permanent exemption and are caught off guard when the first instalment notice arrives in year two, which is why we flag the coming change well before that first instalment is actually due.

How we handle this

We calculate instalment obligations at the start of each fiscal year using whichever method produces the most accurate and lowest defensible payment for your corporation’s numbers, track the compliance history that quarterly eligibility depends on, and flag a shortfall before interest accrues rather than after. This runs alongside our corporate tax services and our CFO and cash flow planning for incorporated clients.