Tax Trouble on the Installment Plan :CRA SOTW
Payments have a way of going astray at the Canada Revenue Agency
Ray Turchansky, Freelance
Published: Wednesday, July 09
EDMONTON - One part of Canada Revenue Agency's job is to confirm or correct the amount of personal income tax you are supposed to pay. The other part is to collect that money and apply it towards the amount owed. And that's where things have been breaking down.
This year my wife, Lorraine, and I netfiled our tax returns, with her getting a refund and me waiting to pay my amount owing on April 30. Then we were among the many thousands of taxpayers receiving a late-arriving T3 slip, for dividend income received. I immediately filed T1ADJ adjustment forms, attaching a cheque for the additional $147.26 owed by my wife to her form, and increasing my payment by the appropriate amount.
CRA later wrote Lorraine saying they had processed the adjustment, and she owed $147.26 plus interest. When she phoned to say the cheque for the required amount attached to the adjustment form had in fact been cashed by CRA on April 30, they said they thought she sent that cheque as a head start on next year's tax payment and created a 2008 installment account. Wrong.
Similarly, more than a year ago one of my tax clients owed more than $2,400 in taxes for 2006, which she remitted. Alas, she received a letter from CRA asking for payment, and when she questioned them she was told they had applied her 2006 payment to her 2007 installment account.
Yet another client sold one farm for seven figures in 2006 and another for even more in 2007. CRA sent her a reminder asking for six-figure installments every three months from mid-2007 through mid-2008.
This spring we explained that there was no more land to be sold, that she would make installment payments based on her expected 2008 income, and that the massive installment payment made in March 2008 should be applied towards her 2007 tax owing.
People who do not have sufficient tax withheld at source, often the self-employed or seniors who no longer work, are usually required to make installment payments. If you owe more than $3,000 in the current tax year, plus one of the two previous years, you will likely be asked to pay quarterly installments, and there are three ways to determine those amounts.
The most common is the installment reminder method. CRA sends out a notice in February for amounts due March 15 and June 15, based on your tax owed two years ago. Then it sends out another notice in August for amounts due Sept. 15 and Dec. 15, based on the tax return you filed in spring for last year. If you use this method and the total year's installments prove to be insufficient, you will not be subject to penalties or interest.
A second option is the prior-year method, where you pay installments based on the previous year's income. This is advantageous if your previous year's income is less than your current year's income.
A third choice is the current-year method, where you pay installments based on an estimate for your current year's income.
It's advantageous if that income is less than your previous year's income. However, if your current-year income estimate is too low, you may have to pay interest on the shortfall.
One word of caution: Use projected future installment amounts calculated by your tax preparer as a guide only, and watch for the actual amounts on CRA's installment reminders.
You may make installment payments using the CRA's installment remittance forms, issued with the installment reminder, directly to CRA or at a financial institution. Or you can fill out form T1162A allowing CRA to withdraw the installment amounts from your bank account on the due dates.
A mistake that some people make is simply ignoring the installment reminders they receive from CRA. This can cause you to be charged a significant amount of interest, as well as facing a large tax bill when you prepare your return.
A less-common mistake is simply not claiming the installment payments you made when file your return. You will receive one installment reminder with a statement on the back showing how much CRA received in installment payments during the first six months of the taxation year, and a later reminder with a statement on the back showing amounts received during the full 12 months. Claim the latter amount.
One of my new tax clients had previously filed a tax return and paid some $9,000, only to have it returned later by CRA. Her former tax preparer had not claimed installment payments she made during the year.
Whether it's installment or non-installment payments, make sure CRA is applying them to the taxation year you intend them for.
Ray Turchansky, a freelance writer and income tax preparer, may be contacted at turchan@telusplanet.net
© The Edmonton Journal 2008
-----------------------------------------------------------------------------------------------------
Miss a Tax Tale Miss a lot!
Pop the link below into your browser to view the entire CRA SOTW Library!
http://canada.revenue.agency.angelfire.com
-------------------------------------------------------------------------------------------------------
Alan Baggett – Tax Collector’s Bible
Payments have a way of going astray at the Canada Revenue Agency
Ray Turchansky, Freelance
Published: Wednesday, July 09
EDMONTON - One part of Canada Revenue Agency's job is to confirm or correct the amount of personal income tax you are supposed to pay. The other part is to collect that money and apply it towards the amount owed. And that's where things have been breaking down.
This year my wife, Lorraine, and I netfiled our tax returns, with her getting a refund and me waiting to pay my amount owing on April 30. Then we were among the many thousands of taxpayers receiving a late-arriving T3 slip, for dividend income received. I immediately filed T1ADJ adjustment forms, attaching a cheque for the additional $147.26 owed by my wife to her form, and increasing my payment by the appropriate amount.
CRA later wrote Lorraine saying they had processed the adjustment, and she owed $147.26 plus interest. When she phoned to say the cheque for the required amount attached to the adjustment form had in fact been cashed by CRA on April 30, they said they thought she sent that cheque as a head start on next year's tax payment and created a 2008 installment account. Wrong.
Similarly, more than a year ago one of my tax clients owed more than $2,400 in taxes for 2006, which she remitted. Alas, she received a letter from CRA asking for payment, and when she questioned them she was told they had applied her 2006 payment to her 2007 installment account.
Yet another client sold one farm for seven figures in 2006 and another for even more in 2007. CRA sent her a reminder asking for six-figure installments every three months from mid-2007 through mid-2008.
This spring we explained that there was no more land to be sold, that she would make installment payments based on her expected 2008 income, and that the massive installment payment made in March 2008 should be applied towards her 2007 tax owing.
People who do not have sufficient tax withheld at source, often the self-employed or seniors who no longer work, are usually required to make installment payments. If you owe more than $3,000 in the current tax year, plus one of the two previous years, you will likely be asked to pay quarterly installments, and there are three ways to determine those amounts.
The most common is the installment reminder method. CRA sends out a notice in February for amounts due March 15 and June 15, based on your tax owed two years ago. Then it sends out another notice in August for amounts due Sept. 15 and Dec. 15, based on the tax return you filed in spring for last year. If you use this method and the total year's installments prove to be insufficient, you will not be subject to penalties or interest.
A second option is the prior-year method, where you pay installments based on the previous year's income. This is advantageous if your previous year's income is less than your current year's income.
A third choice is the current-year method, where you pay installments based on an estimate for your current year's income.
It's advantageous if that income is less than your previous year's income. However, if your current-year income estimate is too low, you may have to pay interest on the shortfall.
One word of caution: Use projected future installment amounts calculated by your tax preparer as a guide only, and watch for the actual amounts on CRA's installment reminders.
You may make installment payments using the CRA's installment remittance forms, issued with the installment reminder, directly to CRA or at a financial institution. Or you can fill out form T1162A allowing CRA to withdraw the installment amounts from your bank account on the due dates.
A mistake that some people make is simply ignoring the installment reminders they receive from CRA. This can cause you to be charged a significant amount of interest, as well as facing a large tax bill when you prepare your return.
A less-common mistake is simply not claiming the installment payments you made when file your return. You will receive one installment reminder with a statement on the back showing how much CRA received in installment payments during the first six months of the taxation year, and a later reminder with a statement on the back showing amounts received during the full 12 months. Claim the latter amount.
One of my new tax clients had previously filed a tax return and paid some $9,000, only to have it returned later by CRA. Her former tax preparer had not claimed installment payments she made during the year.
Whether it's installment or non-installment payments, make sure CRA is applying them to the taxation year you intend them for.
Ray Turchansky, a freelance writer and income tax preparer, may be contacted at turchan@telusplanet.net
© The Edmonton Journal 2008
-----------------------------------------------------------------------------------------------------
Miss a Tax Tale Miss a lot!
Pop the link below into your browser to view the entire CRA SOTW Library!
http://canada.revenue.agency.angelfire.com
-------------------------------------------------------------------------------------------------------
Alan Baggett – Tax Collector’s Bible