On this week’s episode, we’re going to talk about some stuff that nobody wants to talk about, which is some CRA basics. Basically, how do installments work, how are they calculated? When do you have to pay them? How are penalties calculated? What are your deadlines for filing various things, and we’ll give you some basic tips and tricks on how to avoid having the CRA on your back. So let’s get going. So installments, do you have to make installments? Well, if you’re brand new to business and you’ve just started making money, and I’m talking taxable income, which is different than the profit in your company’s bookkeeping, it can have some adjustments, but let’s just assume it’s your company’s profit. So if you’re earning profit and you owe more than $3,000 in federal corporate tax in your first year, you’re going to have to make installments for the following year.

(01:26)
Similar to the dividend trap that I talk about in my Salaries versus dividends podcast, this puts a lot of entrepreneurs in a bit of a precarious position because not only did they come to the end of the year, usually when you’re in startup mode or you’re growing, you’re spending all the cash that you have, so you haven’t tucked enough away to even cover this year’s taxes, let alone starting to make installments right away for next year. So you’ve got a couple different accounts that you need to worry about here. For federal corporate taxes, if you owe more than $3,000 in a year, you’re going to be expected to make installments next year, and we’ll talk about how those are calculated in a bit. And the same for annual filers. For federal G-S-T-H-S-T, it’s going to be your prior year’s taxes payable. If it’s above $3,000, you’re going to have to make quarterly installments on that as well.

(02:09)
Note that you’re, if you’re an Alberta company, you’re exempt from making Alberta installments. If you’re a Canadian controlled private company, you claim the small business deduction in the previous year and you had taxable income of less than $500,000, which is a lot of our clients. The trick here is that you still owe Alberta tax. You just don’t need to make installments for the following year. So that just makes your Alberta tax bill a bit bigger for next year. Although Alberta’s corporate tax rate for small businesses is currently only at 2%, so it’s not as big a deal. So we’ve established that you need to make federal corporate tax installments and federal GST installments for annual filers. So when are those due? Well, you have to make quarterly installments. You get exempt from monthly installments if you have a perfect compliance history with the CRA, you claimed the small business limit in the prior year.

(02:58)
And together with companies, you have taxable income of less than $500,000 and you have a taxable capital employed in Canada Threshold as well that you have to meet. And that’s for the related group. And those calculations are based on your prior year. In that case, you’re going to be able to make quarterly installments and they’re going to be due on the last day of every complete quarter for the following tax year. If you aren’t eligible because you haven’t met those criteria, you’re going to owe monthly and it’s going to be at the end of the month. So how much do you have to make? Well, first of all, if you log into my business account, there should be a calculator on there that tells you how much you have to make. And it should also be noticed noted on your notice of assessment. And of course, if you’re an Aiken Henderson client, we put that rate on your transmittal letter, how much we anticipate you’re going to have to make in installments next year.

(03:43)
But generally speaking, there’s three methods for how much you have to install. So method one, if you’re on quarterly, it’s going to be a quarter of your estimated tax payable for the current year or a quarter. This is method two, a quarter of last year’s taxes payable, or you can basically pick any amount that you want for installments. If you think your sales are going down, you can lower the installment base from what it should be under the other calculations. The trick is if you’ve under installed and it comes due that you owe taxes at the end of the year, you’re going to have to pay some interest on the difference. And if the interest is sufficiently high, then there’ll be a penalty as well. So you got to be careful on using any type of installment you want because that can lead to interest penalties.

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And if you do it enough, then the CRA is going to take notice of you. So what happens if you get them wrong, as in that scenario where we just talked about you’re going to short your installments based on the calculated amount and you actually end up owing tax at the end of the year? Well, there’s going to be interest calculated on the shortfall and the CRA’s prescribed rate of interest is currently 9% and it’s compounded daily. And if you owe more than a thousand dollars of that interest, there’s going to be a penalty as well. And here’s a key takeaway. So if you have a December 31st year end and you’re coming up to the end of the year and you haven’t made any installments because it’s your first year, let’s say that you owe 20,000 in tax, and let’s say that that’s for a complete calendar year, you’re going to owe on March 31st, again, one quarter of 20,000.

(05:09)
So not only will your taxes payable of 20,000 be due to the Fed, to the CRA on March 31st, but you’ll owe an additional $5,000 for next year’s installments. So while you think you may only owe $20,000 and you may have that tucked away, you’re actually going to owe 25. Not only that, but by the time June 30th rolls around, you’re going to owe another five. And remember to stay in to quarterly installments, you have to make sure that you have a perfect compliance history, meaning you file everything on time, you pay all your installments on time, and you pay all your taxes on time. So it’s really important to get this stuff right because it can get expensive, particularly when the CRAs prescribed rate of interest is at 9%. Of course, that is on the difference between what you did install and what you should have installed, but 9% super high.

(05:53)
I’m not sure that I pay 9% on anything, and I certainly don’t want to pay that to the CRA. Alright, I think we’ve beat installments to death. Let’s switch gears here and talk about deadlines for a little bit. So you have a variety of deadlines. There’s deadlines on GST filings, GST payments, corporate tax filings, corporate tax payments. You’re going to have deadlines on payroll. Let’s drill in on payroll. I’ll start with the worst to the lightest. The reason I picked payroll first is because doing this late or submitting your payroll withholdings late probably carries some of the heaviest penalties in our system. And the reason for that is once you withhold payroll deductions from your employee’s paycheck, you now are holding it in trust on behalf of your employee and you need to send that into the CRA so that the CRA can apply that to those employees’ personal tax accounts.

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So the CRA get really funny about you holding money in trust on behalf of your employees because it’s not your money, it’s not the CRA’s money, it’s an installment for your employees. So payroll source deductions are generally due by the 15th of the month after you paid the employees. So if it’s a November 20th pay run, all the amounts that you withheld off that paycheck need to go into the CRA by December 15th. Now, if you fail to make that remittance and they’ve got a way of catching it, they’ve got various ways to catch these things, you will be charged a penalty of 3% if you’re one to three days late, 5% if you’re four or five days late, 7% if you’re six or seven days late and 10% thereafter. So generally speaking, when you’re late, it’s by more than a week. And so you’re going to end up with a 10% penalty.

(07:34)
Now, here’s the kicker. If you’re a repeat offender, they can double that 10% to 20%. So if you’ve got a withholding amount for any particular pay run of say, 30 or $40,000 and you’re late on it, you can have a 10 or a 20% penalty apply on that. Depending if you’re a repeat offender, that can be very, very expensive. So you may want to make sure that you get this stuff right. Here’s a hot tip on payroll. Get a payroll provider. There’s lots of good payroll providers out there like Wage Point and Payment Evolution, who will do all the things for you though. You can go and run the payroll in the platform. They’ll draw the money from the company’s bank account, they’ll deposit it directly into the employee’s bank accounts and they’ll send their CRA their remittances on time every time, and you have to worry about it minimally.

(08:20)
The only responsibility that you have to have is running the payroll and making sure that there’s enough cash in the bank to satisfy the pay run. Alright, so you’ve missed your payroll withholdings. That’s not good. You’re going to be charged a 10 or a 20% penalty depending on if you’re a repeat offender. Here’s the kicker is you’re also being charged interest on the overdue taxes at the CRA prescribed rate, which is currently at 9%. Switching now to corporate taxes. So corporate taxes, generally speaking, are due to be paid two months after the company’s fiscal year. So if you’ve got a December year-end, that payment of taxes payable is due February. Now, this is true for investment companies, most holding companies, and non-Canadian controlled private companies, but if you’re a Canadian-controlled private company or small business in Canada, chances are you’re going to get a one-month extension, or your taxes are due to be paid three months after the company’s fiscal year-end.

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So it’s often hard to get a year-end done within two months of the fiscal year-end closing. And so what you’ll generally have to do is make an estimate and either decide if the installments you put in are sufficient to cover the estimate or if you need to make an extra payment. So that’s the tax payment deadline. And by the way, that’s both for Alberta and Federal. The tax filing deadline for all companies is six months after the fiscal year-end. So if you’re late paying, you’ll be charged an Interest series. The prescribed rate on overdue balances is currently 9%, whereas if you’re late filing, you can be up to 17% in a penalty. And here’s how that calculation works. So if you’ve passed the six months, you’ll be charged an instant 5% for late filing, plus you’ll be charged an additional 1% for every month that you’re late up to a maximum of 12 months.

(10:08)
That’s how you get to the 17% penalty. And that penalty, of course, is calculated on the balance that you owe. So if you’ve made installments sufficient to cover your entire tax bill, the penalty should be five to 17% of $0 taxes payable. So you shouldn’t actually owe a penalty. And that’s the same as the calculation for interest. Alright, moving on to GST. Annual GST filers must file and have paid their GST three months after the fiscal year-end. So if you’ve got a fiscal year end of December, you have to ensure that your GST is filed and your GST balance payable is paid by the end of March of the following year. If you are quarterly, your GST, your quarterly GST is due to be filed and paid at the end of the month following the quarter for which you’re reporting. And that’s the same for monthly.

(11:01)
So if you’re on monthly GST Cadence, you have to file and pay one month after the month which you’re reporting on, and you remember those pesky late filing penalties. Well, if you file late, the CRA are going to charge you a one-time shot of 1%, and then they’re going to charge you 25% of that amount for every month up to a maximum of 12 months if it’s late and they want you to file it electronically, not doing so as a hundred dollars penalty. Do you know how sometimes you’ll put in a GST return even when you don’t have the amounts totally figured out to fend off the penalty? Well, the CRA could charge you up to 10% on the difference between the amount that you did report and the amount that you should have reported, depending on the reasons why I’ve not seen the supplied in practice.

(11:45)
However, David Crawford, our national indirect tax expert at Aiken Henderson, tells me that he sees it quite often. T for employment income and T fives are due to be filed with the CRA by February 28th of the year following the year, which you’re reporting on. This can be problematic for a lot of December year-end companies who don’t have their stuff sorted out by February 28th, and they need to submit either AT five for dividends or interest payments and the T fours. If you’re on a payroll provider, it shouldn’t be hard to make that February 28th deadline. But if you’re constantly scrambling to get your December year-end done, this February 28th deadline can be really tricky. March 31st is the deadline to have your T three trust in the state returns in. And as it turns out, a lot of partnership returns. So if you have a partnership return that has any individuals who own it, you’re going to need to file T 50 13 partnership information return by March 31st.

(12:43)
The reason for that is because the individuals need to receive those T 50 thirteens or those T threes from trusts and estates so that they can complete their taxes by April 30th, which is most common personal tax deadline. Of course, if you have a personal tax return with business income on it, as in you have a proprietorship, that deadline for you gets extended till June 15th, although you still have to pay your taxes by April 30th. I’m not sure if that’s confusing enough for you. Alright, so I realize that this has been an incredibly dry and boring podcast about deadlines and installments. Let’s throw in some best practices that you can follow to make sure that you don’t run afoul of the CRA. Because remember, in addition to the heavy penalties and interests that you will pay for getting behind, if you owe tax, you’re now going to have the CRA on your back and they’re one of the worst creditors ever.

(13:36)
They have really wide sweeping powers that are legislated to them where they can come and start repossessing things and garnishing your bank accounts and you don’t want to get on their bad side. They’re an awful creditor. So, do not use the CRA as your line of credit. It’s a bad idea. Best practice number one, make sure that your year-end books are closed, reviewed, and delivered to your accountant within 30 days of year-end. This is going to take having a really good bookkeeper on your team. I did a couple of great podcasts on this topic. The first one is called From Bean Counters to Strategic Partners, the difference between a bookkeeper controller and a CFO. It’ll help you understand the various roles that you need to fill in your company’s finance department and how you can do it for a fraction of the cost of actually hiring those people, fulltime.

And the second podcast I called from Chaos to Clarity how good bookkeeping can save your business. This is absolutely one of the ways is by keeping the CRA off your back. Alright, best practice number two is to ensure that your books are closed and reviewed within 15 days of month end every single month. Well, you may go, well, I’m not sure how to review my books. I’ve actually recorded a great guide on how to help you through reviewing your books and what to look for. It’s called A Business Owner’s Guide to Reviewing their Books at Year End. There’s a blog version on the website, and I’ve got a podcast recorded that runs through it as well. Of course, this blog and podcast are geared towards your end, but there are principles that you can apply every single month. So you should be reviewing your sales, your accounts receivable aging report to make sure it’s current and up to date, and actually reflects the money that you are owed your accounts payable aging report to reflect.

(15:17)
Make sure that it reflects the amounts that you actually owe to people. Do a review of your shareholder loan account to make sure that things aren’t being erroneously dumped in there and either creating a benefit or an expense to you personally. You should look at all the expense categories. Go through them, make sure that the individual line items for that month in a particular expense category makes sense. Are there some meals and entertainment that got grouped in with the communications and telephone account, et cetera, and you want to make sure that your expenses are reasonable. Most business owners can look at their expense lines for a particular month and do a quick sniff test on them to make sure that they make sense. And you should be doing that every single month. Alright, and best practice number three is I highly recommend that you go set up all of your installment due dates for all your tax accounts and your filing deadlines and your payment due dates in your calendar as calendar reminders so that they always stay top of mind.

(16:15)
And it creates a bit of a sense of urgency on this stuff because we all know that entrepreneurs wear a ton of hats and tax is their least favourite hat. Tax and accounting generally are not the favourites for most entrepreneurs. But by having these in your calendar and having them top of mind, it will create a bit more of a sense of urgency. One of the things that I do with relation to best practice number three is when I speak with my accountant, who is me at year-end and I give myself my installments for the following year, I actually log into my online banking platform for my business and I pre-program those installments in so that they automatically happen without me having to do any more inputs during the year so I can set it and forget it. Now, if I have a rockstar year and I need to make a few more installments, I can assess that throughout the year and decide if I want to bump up my installment account.

(17:04)
Whereas if I’m having a poor year, I can decide if I want to go in and adjust those pre-programmed amounts in my online banking. But these types of things make it a lot easier for you to manage your installments and to keep the expectations for installments filing deadlines and avoid interest in penalties, keeping all of that top of mind. So that’s it. If you have any questions about how installments work your tax deadlines, how interest in penalty works or why you’ve been digging with a big bill from CRA for being delinquent, I’d love to have a look at that with you and hear all about your business.