Instalment interest and penalty charges
If you received an instalment reminder and you were required to pay instalments but did not comply, you may have interest and penalty charges.
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You will be charged interest if all of the following conditions apply:
- we send you an instalment reminder in 2020 that shows an amount to pay
- you must pay by instalment in 2020 (see Do you have to pay tax by instalments?)
- you did not make instalment payments, or you made payments that were late or you 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 three months.
How do we determine the interest?
- We calculate interest on each instalment payment that you should have paid from the day it was due to your balance due date based on the payment option that results in the least amount of interest.
- We calculate the interest on each instalment you paid for the year starting from the later of the date the payment was made or January 1 up to the balance due date.
Then, we determine the interest you owe by charging the difference between a. and b., if the difference is more than $25.
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 2020 are more than $1,000.
To calculate the penalty, we determine which of the following amounts is higher:
- 25% of the instalment interest that you would have had to pay if you had not made instalment payments for 2020
Then, we subtract the higher amount from your actual instalment interest charges for 2020. Finally, we divide the difference by two and the result is your penalty.
Example – Instalment penalty and interest
For 2020, John made instalment payments that were less than he should have paid. As a result, he has $2,500 of actual instalment interest charges for 2020. If John had not made any instalment payments in 2020, his instalment interest charges would have been $3,200. Since 25% of $3,200 is $800, we subtract $1,000 (the higher amount) from $2,500. The difference is $1,500. Then, we divide $1,500 by two. John's penalty is $750.
How can you reduce your instalment interest and penalties?
You can reduce or eliminate the interest charges and penalties by overpaying your next instalment payment or by paying it early. By paying early or overpaying, you will 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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