Interest and penalty charges - Required tax instalments for individuals
Interest and penalty charges
Instalment interest and possible penalty charges will be applied if you do not pay your required tax instalments or paid insufficient amounts.
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You will be charged instalment interest if all the following apply:
- You are required to pay by instalments in 2021
- You receive an instalment reminder in 2021 that shows an amount to pay
- You did not make any of your instalment payments, paid late, or paid less than what you had to pay
We charge instalment interest on all late or insufficient instalment payments. Instalment interest is compounded daily at the prescribed interest rate, which can change every 3 months.
How we calculate your interest
Interest on each instalment payment you should have paid
We calculate interest from the day it was due to your balance due date, based on the payment option that results in the least amount of interest.
- minus by $B
Interest on each instalment you paid
We calculate the interest for the year starting from the date the payment was made or January 1 (whichever date is later) up to the balance due date.
- equals $C
Your charge (if more than $25)
The interest you owe is the difference between A and B.
You may have to pay a penalty if your instalment payments are late or less than the required amount. We apply this penalty only if your instalment interest charges for 2021 are more than $1,000.
To calculate the penalty, we determine which of the following amounts is higher.
If a flat rate of $1,000 is higher: Option 1 of 2
You are charged: $1,000
If 25% of the interest is higher: Option 2 of 2
You are charged: 25% of the instalment interest you would have paid if you had not made instalment payments for 2021
We subtract the higher amount from your actual instalment interest charges for 2021. We then divide the difference by 2 and the result is your penalty.
Example – Instalment penalty and interest
For 2021, John made instalment payments that were less than what he should have paid. As a result, his actual instalment interest charges for 2021 is $2,500.
If John had not made any instalment payments in 2021, his instalment interest charges would have been $3,200.
To determine John’s penalty, we first calculate which rate is higher:
- $3,200 (interest if no payments were made)
- times by 25% (percentage rate)
- equals $800 (total using the 25% calculation)
Since the flat rate ($1,000) is higher than the 25% calculation ($800), we use the flat rate to calculate John's penalty:
- $2,500 (actual interest charges)
- minus $1,000 (flat rate)
- equals $1,500 (difference between actual interest and rate)
Now you divide the $1,500 by 2. John's instalment penalty would be $750.
Reduce your instalment interest and penalty charges
You can reduce or eliminate interest and penalties if you do one of the following:
- overpay your next instalment payment
- pay your next instalment early
This will allow you to earn instalment credit interest. This credit interest is not refundable and can only be used against any interest charges on late payments for the same tax year.
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