Example of instalment interest and penalty calculation

Example

This is an example of how we calculate instalment interest and penalty using the offset method.

Corporation D has a December 31 year end and has to make monthly instalment payments of $75,000 starting in January 2018.

Corporation D only makes two instalment payments in the year. It makes one payment of $120,000 on March 12 and a second payment of $150,000 on April 25.

Therefore, when we assess Corporation D’s return, we will charge $16,101.00 in instalment interest. We used an underpayment interest rate of 5% compounded daily in the following calculation.

Summary of instalment interest for Corporation D
Date
2018
 
Instalment
payment due
($)
Payment
received
($)
Balance
($)
 
Number
of days
 
Interest
($)
 
January 31 75,000     75,000.00 28    288.20
February 28 75,000   150,288.20 12    247.24
March 12   120,000   30,535.44 19      79.57
March 31 75,000   105,615.01 25    362.29
April 25   150,000   (44,022.70) 5      (30.16)
April 30 75,000     30,947.14 31    131.69
May 31 75,000   106,078.83 30    436.81
June 30 75,000   181,515.64 31    772.41
July 31 75,000   257,288.05 31 1,094.84
August 31 75,000   333,382.89 30 1,372.79
September 30 75,000   409,755.68 31 1,743.64
October 31 75,000   486,499.32 30 2,003.29
November 30 75,000   563,502.61 31 2,397.88
December 31 75,000   640,900.49 59 5,200.51

The total instalment interest we will charge Corporation A on its balance-due day of February 28, 2019 is $16,101.00.

Penalty

Based on Corporation D's instalment interest of $16,101.00, we will assess a penalty of $4,484.12 as follows:

Calculation of instalment penalty for Corporation D
Description Amount
Instalment interest $16,101.00
Minus the greater of: $1,000, and 25% of the instalment interest charged if Corporation A had made no payment at all ($28,531.05 × 25%)
$7,132.76
Difference $8,968.24
Instalment penalty (one-half of the difference) $4,484.12
 
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