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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

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