In Canada, business income taxes are generally not withheld at source, so corporations (and some sole proprietors or partnerships) must pay income tax by instalments throughout the year if certain conditions are met.

Why Do You Pay Both at Filing and Instalments in the Same Year?

When you file a corporate income tax return (T2), you are reporting your actual income and tax owing for the previous fiscal year.

But Canada’s tax system is pay-as-you-go. That means the government wants you to pay taxes on your current year’s income in real time, instead of waiting until the year is over.

So:

· At filing: You pay last year’s final tax bill, minus any instalments you already paid.

· Instalments: You’re prepaying the current year’s taxes, based on last year’s figures.

Instalment Thresholds

A corporation is required to pay income tax by instalments if:

· The total taxes payable for either the current year or any of the two previous years is more than $3,000.

For individuals (including sole proprietors and partners), the threshold is also $3,000 (or $1,800 in Quebec).

Instalment Schedules for Corporations

There are three instalment options for corporations:

1. Monthly Instalments (default)

· Due on the last day of each month of the tax year.

· Applies if your business is not a Canadian-controlled private corporation (CCPC), or if taxes payable exceed $3,000 in either of the two prior years.

2. Quarterly Instalments

· Only available to eligible CCPCs with:

o   Taxable income under $500,000 in the current and previous year.

o   Total taxable capital employed in Canada under $10 million.

o   Perfect compliance history (no unpaid taxes or penalties).

· Instalments due: last day of each quarter (e.g., March 31, June 30, etc.)

3. Annual Payment

· Available to new corporations or those under the $3,000 threshold.

· You pay the full amount when filing the return.

How Are Instalments Calculated?

There are three options for how much to pay:

1. No-Calculation Option (most common)

· Use last year’s taxes payable as the total, and divide by 12 or 4 depending on your frequency.

2. Prior-Year Option

· Use the taxes from the year before last.

3. Current-Year Option

· Estimate the current year’s income and tax — but risky if you’re wrong, as CRA may charge interest.

CRA allows you to choose whichever method results in the lowest payments. However, if you underpay, interest applies.

Example

Let’s say your corporation owed $12,000 in taxes for 2024.

You file your 2024 return in June 2025 and pay the $12,000 at that time.

Because your tax owing in 2024 was over $3,000, you must also start paying 2025 instalments:

· Using the no-calculation method, you would divide $12,000 by 12 = $1,000/month, starting in July 2025 through June 2026 (unless you catch up earlier in the year).

So you’re paying for two years of tax in 2025:

· Paying last year’s actual taxes (2024).

· Paying this year’s estimated taxes (2025) through instalments.

Tip

CRA typically sends instalment reminders based on your past returns. These reminders are not mandatory amounts, just suggestions — you can pay more or less, as long as you pay enough total to avoid interest.”

Connect with us today to stride confidently towards your corporation’s compliance and governance goals.