Do you need to pay taxes by installment?
Tax installments are taxes you pay on the income you make throughout the year instead of as a lump sum on April 30.
In 2021, if you earned income that did not have income tax withheld — for example, if you are self-employed or had income from COVID-19 emergency government assistance programs — you may need to pay tax by installments in 2022.
In any given year, you have 3 options for calculating your tax installments:
- The “no-calculation” option: The amount you owe is calculated for you by the CRA based on your latest assessed tax return,
- The “prior-year” option: You figure how much you owe, based on the previous tax year (even if the CRA has not yet assessed that tax return), or
- The “current-year” option: You calculate how much you owe based on your earnings for the current year.
Your taxable income in 2021 may not be similar to your income in previous years. If that’s the case for you and you pay tax by installments, the “current-year” option to calculate your tax amounts owing may be most appropriate for 2022. The CRA provides a free calculation chart to help you determine your tax installments due.
Did you receive income from government subsidy programs to help with payroll costs?
In 2020 and 2021, the federal government provided emergency assistance to help business owners with payroll costs.
- The Canada Emergency Wage Subsidy (CEWS) program was effective from March 15, 2020, to October 23, 2021.
- The CEWS was then replaced by two new programs, one of which — the Hardest-Hit Business Recovery Program (HHBRP) — may apply to doctors and dentists. The HHBRP will extend to May 7, 2022.
- The Canada Recovery Hiring Program (CRHP), a hiring subsidy for eligible employers who experienced a drop in revenue due to COVID-19, was introduced on June 6, 2021, and is scheduled to last until May 7, 2022.
Any financial assistance you receive from these programs will be taxable income for 2021 and will need to be reported on your Corporate or Partnership tax return.
To validate payments under the CEWS and other programs, employers’ T4 reporting requirements changed in 2020. Compared to previous years, employers are now required to provide more information about when employment income was paid during the year.
Did you receive assistance from the government to help with business or rental costs?
The federal government’s financial response to COVID-19 also included assistance for business owners with rental and business costs.
- The Canada Emergency Business Account (CEBA) provided emergency interest-free loans to small businesses, including a forgivable loan component. The CEBA program was open for applications from April 9, 2020, to June 30, 2021.
- In September 2020, the Canada Emergency Rent Subsidy (CERS) was announced. CERS is a forgivable loan for rental costs similar to the CEWS program for payroll costs. It is scheduled to be in place for eligible applicants until May 7, 2022.
- The CERS program replaced the Canada Emergency Commercial Rental Assistance (CECRA) program, which provided financial assistance in 2020 to commercial property owners who, in turn, provided rent forgiveness to their small business tenants affected by the COVID-19 pandemic.
Any assistance your business received from CERS is taxable when received but is deductible if and when repaid. The forgivable portion of CEBA is also taxable when received but deductible if and when repaid.
In 2021, the ongoing COVID-19 pandemic presented multiple challenges for business owners, including doctors and dentists. These include the challenge of understanding and navigating the different and changing sources of assistance your business may be eligible for — and, at tax time — accurately reporting the assistance and adjusting tax installment payments to reflect your current income accurately. Make sure you take the time to understand how these changes impact your tax obligations or consult your accountant.
Related story: Everything you need to know about paying tax by installments in Canada
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
