A friend recently reached out in panic after preparing her 2025 tax return, which showed $140,000 owed in taxes. The large balance stemmed from selling an income property and realizing a significant capital gain. Her accountant warned she might be required to enter the quarterly instalment system for 2026, with payments of $35,000 each quarter. However, since she typically received refunds in prior years, she was unlikely to face instalment obligations for 2026 if she expected another refund.
When Are Instalments Required?
Under the Income Tax Act, quarterly tax instalments are mandatory for a given tax year if your balance due for that year exceeds $3,000 (or $1,800 for Quebec residents) and your balance due exceeded that threshold in either of the two preceding years. For 2026 instalments, the CRA looks at your 2025 and 2024 tax returns.
Three Calculation Options
Taxpayers can choose among three methods to determine quarterly payment amounts, selecting the one that minimizes payments. However, paying less than the no-calculation option may trigger instalment interest and penalties.
- No-Calculation Option: The CRA calculates March and June instalments as 25% of your 2024 balance due. September and December instalments are 50% of your 2025 balance due minus the earlier payments.
- Prior-Year Option: Each instalment equals one-quarter of your 2025 balance due. This works best if 2026 income and deductions are similar to 2025 but lower than 2024.
- Current-Year Option: Base payments on your estimated 2026 tax balance, paying one-quarter each due date. This is risky if your estimate is inaccurate, leading to interest and penalties.
Consequences of Missing Instalments
The CRA charges arrears interest on late or deficient instalments, compounded daily at the prescribed rate. If instalment interest exceeds $1,000, a penalty may also apply. The prescribed rate is set quarterly based on Government of Canada three-month Treasury bill yields.
Understanding these rules helps taxpayers avoid unnecessary costs and manage their cash flow effectively.
