For years, corporate taxpayers paid very little attention to the bottom part of their annual corporate tax assessment notices. That bottom part summed up late installment charges that are included in the final tax bill. For years, installment interest charges hovered around 5% annualized so forgetting an installment or not paying the final balance owing on time had no material financial consequences.
Installment Interest Charge Increase from 5% to 9%
However, as we approach the end of 2024 third quarter, the interest charged by CRA on overdue taxes is 9% annualized. This applies to personal taxes, corporate taxes, GST and payroll withholdings.
Corporations Are Required to Make Tax Installments to CRA
Corporations are required to make tax installments. Corporate tax installments are generally required monthly. Installment interest is applied on the date that an installment is due. If a taxpayer was required to make $ 1000 per month for 12 months and none was made, the missed January $1000 installment would be charged an annualized rate of 9 percent starting January. The February $ 1000 installment would be charged the same annualized rate starting in February. And so on. Hence, the taxpayer would incur a little more than 4.5 percent installment interest cost or about $ 540 plus for the year. (The plus is because daily compounding is taking place in the background). This is not sounding too bad right now. In the real world, a corporate taxpayer generally does not begin the process of the year end until at least two months after the year end. At worse, the year end and the corporate tax return are completed on the due date which is six months after the year end. By this time, the entire $12000 has been outstanding for another six months at the 9 percent annualized rate (assuming the prescribed rate has not changed in the past six quarters). This adds another $540 plus to installment interest. Now total installment interest for the tax year in question is more than $1080, which is more than the $1000 installment interest threshold; hence, installment penalty will kick in. And this is how it all can spiral out of control very quickly.
Corporations fail to make the necessary installments for various reasons. Cash flow problems due to slow business, late receivables, high inventory, etc. Sometimes, the corporation is much more profitable than the prior year and the final balance is due three months after the year end even if filing is due six months after the year end. Another common reason is the corporation is not aware that no small business deduction is available for the year and all the profit is subject to the higher corporate tax bracket.
There is recourse to reduce or eliminate installment interest and penalties. The taxpayer can overpay all future installments and pay as early as possible. CRA pays installment interest credit on early and overpayments. This interest credit is not refundable and can only be used against interest charges on insufficient or late installments for the same tax year. The rate CRA uses to calculate this credit is 5% annualized.
Talk to your Banker for a Bank Loan
Using CRA as a credit facility is expensive. CRA prescribed rate is higher than a secured line of credit offered by most major banks in Canada. In addition, interest and penalties charged by the CRA are not deductible whereas interest paid to the bank for business related loan is deductible. If you want to avoid CRA interest and penalties – see your banker.
For More Tax Advice Talk To Mew & Company Vancouver Tax Advisors For Canadian Businesses
Contact Us – MEW and COMPANY Chartered Professional Accountants
Suite 418–788 Beatty St. Vancouver, BC V6B 2M1
Tel: 604 688 9198 | Fax: 604 688 9192
