Section 1 – Tax System
Income Tax Payments
Income tax payments are normally made by means of deductions at source for employment income or by instalments for other sources of income. Any balance owing at the end of a year is payable on April 30 of the following year whether the return has to be filed on April 30 or June 15.2 Interest is compounded daily on any balance due after this limit date.
2 If the payment deadline falls on a Saturday, Sunday or statutory holiday, the rule in footnote 1 in this Section generally applies.
Employees and pension plan administrators who make certain payments are required to withhold amounts set by tax regulation and to remit them to the appropriate government.
Tax withholdings include deductions made by employers on remuneration paid to employees and on lump-sum payments.
The governments publish withholding tax tables with which payers must comply. However, lump-sum payments are subject to the following fixed rates:
|$5,000 and less||5%||15%||20%||10%|
|$5,001 – $15,000||10%||20 %3||30%3||20%|
|$15,001 and more||15%||20%4||35%4||30%|
Lump-sum payments from an RPP, a DPSP, an RRSP or a retiring allowance are not subject to withholding if they are transferred directly to another plan without being paid to the beneficiary.
Remuneration of a Self-Employed Fisherman
A self-employed fisherman may elect to have source deductions made on remuneration received at a rate of 20% (federal, including all provinces other than Quebec) and 15% (Quebec) by completing the prescribed forms.
Increase/Decrease of Withholdings
Individuals may have additional amounts withheld by their employer or pension plan administrator if they provide them with the appropriate forms.
Think about increasing your source deductions to avoid having a high balance or instalments to pay when filing your income tax return.
In certain situations, a payer may reduce or even eliminate withholding tax on certain payments made to a taxpayer. However, the taxpayer has to obtain prior approval from the tax authorities. Significant RRSP contributions, a business loss for the year, deductible support payments, charitable donations, medical expenses, tuition fees and moving expenses may justify such a reduction5.
Transfer from a Province
Taxpayers residing in Quebec on December 31 can transfer to Quebec 45% of the income tax withheld at source by their employer for another province. This credit corresponds to the amount that will be transferred to Quebec by the CRA.
A similar provision provides for income tax that has been withheld in Quebec for a resident of another province.
Taxpayers may be required to make instalments with respect to income tax, QPP/CPP, QPIP, HSF and QPPDIP.
Quebec residents are required to remit instalments to the federal government if their net income tax payable for the current year and one of the two previous years is greater than $1,800. The ARQ imposes the same conditions for provincial instalments. The $1,800 federal amount is increased to $3,000 for residents of provinces other than Quebec.
Instalments have to be paid on the 15th day of March, June, September and December. Individuals can authorize the CRA to withdraw pre-determined amounts directly from their bank account. The CRA must receive this authorization at least 30 days before it makes the first withdrawal.
Farmers and Fishermen
Self-employed taxpayers whose principal source of income for 2018 is from farming or fishing and whose net income tax payable for 2016 to 2018 exceeds $1,8006 are only required to make one instalment equivalent to two thirds of net tax payable and any other contributions no later than December 31.
Individuals may choose one of three options to calculate their instalments:
- 1st method: Four payments of 25% each of their estimated income tax payable for the current year;
- 2nd method: Four payments of 25% each of their income tax payable for the preceding year;
- 3rd method: Two payments of 25% each of the income tax payable for the year which is two years prior to the current year and two payments of 50% each of the excess of the income tax payable for the preceding year over the total of the first two instalments, as previously calculated.
Interest on Instalments
The tax authorities send instalment reminders in February and August showing the amounts to be paid on the prescribed dates. The calculations are based on the third method described above.
Taxpayers are free to choose the method that suits them; however, taxpayers who pay the “reminder” amounts by the due dates will not be subject to interest or penalties even if taxes payable are greater than these “reminder” amounts.
Example: After speaking with a consultant, Mr. Collins decided to make instalments based on his 2018 income, which should be lower than in 2017 because he retired in June of 2018. His March, June and September 2018 payments are in line with expectations. However, on December 1, 2018, he made a significant taxable capital gain on a real estate transaction. As the transaction was not taken into account in calculating the instalments, they are insufficient and will result in interest being charged.
Taxpayers who fail to make the required instalments, or whose instalments are insufficient, are subject to daily compound interest. The CRA also charges an additional penalty equal to 50% of the interest where interest charges are over $1,0007. The ARQ, on the other hand, charges a further 10% interest if the instalments are less than 75% of the required amounts. However, interest costs may be reduced or eliminated by prepaying instalments or increasing subsequent ones. The interest and penalties are not deductible.
Example: If a taxpayer has to make quarterly tax instalments of $6,000 in 2018, no interest should be charged if, instead of making payments of $6,000 each on March 15 and June 15, the taxpayer paid $12,000 on May 1.
Be sure you make sufficient instalments by the deadlines in order to avoid non-deductible penalties and interest costs.
Offsetting Interest on Income Tax Payments
In general, interest received on excess tax payments is only taxable to the extent it exceeds interest owing by the individual on insufficient tax payments for the same period.
3 Payments from an RRSP or an RRIF are subject to a 15% withholding tax in Quebec, for a combined rate of 25%.
4 Payments from an RRSP or an RRIF are subject to a 15% withholding tax in Quebec, for a combined rate of 30%.
5 Authorization may not be required if the employer transfers the amounts directly into the employee’s RRSP. Additional information can be found in Guide T4001 – Employers’ Guide – Payroll Deductions and Remittances (federal) and TP-1015.G-V – Guide for Employers: Source Deductions and Contributions (Quebec).
6 $3,000 for residents of provinces other than Quebec.
7 Or where interest exceeds 25% of the interest calculated as if no instalment was made during the year.
Taxpayers can request an accelerated refund if they fulfil certain conditions. Among others, if they have filed a tax return for the preceding year and their return for the current year is filed on time, they do not owe anything to the ARQ or any other government body and they are not claiming a refund of more than $3,000.
The notice of assessment could adjust the amount of the refund and a taxpayer might have to repay any excess amounts received plus any interest. Deceased taxpayers and taxpayers who went bankrupt during the year are not entitled to accelerated refunds.
Refund Transferred to Spouse
Taxpayers may elect to transfer all or part of their refund to their spouse. However, they cannot subsequently rescind or reduce the amount transferred or request an accelerated refund of the remainder. Such a transfer is not possible in the year where one of the spouses deceases.
Taxpayers who receive a lump-sum payment of at least $3,000 (excluding interest) may resort to a special mechanism to compute the tax on such amount as if it had been taxed in the year it should have been paid, provided this method is more advantageous to them. The CRA calculates all of the amounts and applies the necessary adjustments, case permitting. Income eligible for such treatment includes:
- Employment income received and amounts as damages for the loss of employment if such amounts are paid pursuant to an order or judgment of a competent tribunal or an agreement whereby the parties agree to terminate legal proceedings;
- Periodic retirement or pension benefits (other than CPP/QPP benefits), support payments, income insurance plan or EI benefits;
- Income replacement benefits for Canadian Forces members and veterans;
- CPP/QPP benefits in excess of $300 (not $3,000).
The interest portion of a lump-sum payment continues to be taxed in the year the payment is received.
Taxpayers who receive a retroactive lump-sum payment of at least $300 can elect to exclude this payment from their income in the year they receive it and to pay the related tax as if the payment had been received during the year to which it refers.
Possible types of payments include:
- Employment income received under the terms of a court judgment, or an agreement among the parties in connection with legal proceedings;
- QPP/CPP, EI, QPIP and OAS benefits;
- Interest on retroactive payments.
Similar rules apply when taxpayers must pay arrears on support payments or have to reimburse a support payment (this is mandatory, not optional).
All of the amounts are calculated by the ARQ and the additional income tax payable is included in the current year’s income taxes payable and refunds are paid in the form of a non-refundable tax credit.
This document has been updated on August 31st, 2018 and reflects the state of the Law, including draft amendments, at that date.