Dear Sirs:
Re: Quarterly Instalment Requirements
This is in reply to your letter of October 9, 1991, requesting our views on the requirement for individual quarterly tax instalments pursuant to subsection 156(1) of the Income Tax Act (the "Act"). The facts given are as follows:
1.
2. 24(1)
You question whether Mr. A would be required to make quarterly tax instalments in 1992 as more than 75% of his income is not subject to source deductions. It is your understanding that Revenue Canada would not levy penalties or interest on the taxpayer for failure to make instalments in the first year he would be required to do so under section 156 of the Act.
Our Comments
Generally, instalment payments of tax are required if an individual's net federal tax exceeds $1,000 for both the prior and the current calendar year and less than three quarters of the net income for the current year is subject to tax deducted at source. In order to give taxpayers who are required to make instalments some flexibility in their financial affairs, instalments can be based on the lower of their actual taxes paid in the previous year or on what they estimate their taxes to be in the current year.
A penalty of 50% is charged on the amount by which the instalment interest exceeds the greater of - $1,000 or - 25% of the instalment interest calculated as if no instalment payment had been made for the year.
If the taxpayer uses as his base the payments on the Prior Year Option, interest will not be charged for low instalment payments. The reason for this is that instalment payments are always based on the lower of the two years' net tax payable. If the income is expected to decrease, the Current Year Option may be used. However, if the current year estimate is too low, interest may be charged.
We confirm as requested, however, that instalment interest will not be charged for the first fiscal year that instalments are required, in order to allow the taxpayer time to make himself aware of all the requirements that a self-employed person must comply with. This is not the case however where the taxpayer has been advised by the Department by way of instalment notice that he is required to make instalment payments.
We trust these comments will be of assistance to you.
Yours truly,
G. Thornley for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch