Here's How And When You Have To Pay Tax In Instalments To The Cra

A friend reached out to me this week in a panic. She was about to file her 2025 tax return and owed $140,000 in tax, but that wasn’t the source of her concern. It turns out she had sold an income property in 2025, realized a significant capital gain and the tax on that gain was now due.

Her worry was that her accountant told her that since she owed more than $3,000 when filing her 2025 return, she would now be brought into the dreaded instalment system and be obligated to make quarterly instalments of $35,000 each for 2026, based on her 2025 tax owing.

I quickly reassured her that if this was the first time in the past few years that she owed taxes upon filing (she generally got a small refund each year), it was unlikely that she would have to pay any instalments for 2026 since she will probably get another refund for 2026.

But when do you have to pay instalments? Let’s review the rules.

Under the Income Tax Act, quarterly tax instalments are required for this tax year if your balance due for 2026 will be more than $3,000 ($1,800 for Quebec tax filers) and was greater than $3,000 ($1,800 for Quebec) in either 2025 or 2024.

There are three options to determine how much you need to pay each quarter: the no-calculation option, the prior-year option and the current-year option. Taxpayers are free to choose the option that results in the lowest payments. But if you choose to pay less than the no-calculation option, you could face instalment interest, possibly even a penalty, if your payments are too low or late.

Under the no-calculation option, the Canada Revenue Agency calculates your March 2026 and June 2026 instalments based on 25 per cent of the balance due from your 2024 assessed return. The Sept. 15 and Dec. 15, 2026, instalments are then calculated as 50 per cent of the balance due from your 2025 return minus the already paid March and June instalments.

The prior-year option bases the calculation solely on last year’s balance due, and your four 2026 instalments are each one quarter of the 2025 balance due. This option is best if your 2026 income, deductions and credits will be similar to 2025, but significantly lower than in 2024, perhaps because you sold some securities in 2024 and reported large capital gains in that year.

Under the current-year method, you can choose to base this year’s instalments on the amount of estimated tax you think you will owe for this year (2026) and pay a quarter of the estimated amount on each instalment date.

This option is useful if your 2026 income will be significantly less than in 2025. But it’s also the riskiest method because if you’re wrong, you can end up being charged instalment interest, compounded daily at the prescribed interest rate, and an instalment penalty if the instalment interest is more than $1,000.

The reason to be concerned about missing or making a deficient instalment is because the government charges you arrears interest on any late or deficient instalments. The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury bills, but with a lag.

The calculation is based on a formula in the Income Tax Regulations, and it takes the simple average of three-month Treasury bills for the first month of the preceding quarter rounded up to the next highest whole percentage point (if not already a whole number).

The current prescribed rate for the second quarter of 2026 may seem relatively low at three per cent, but that’s only the base rate and there are two other prescribed rates: the rate paid for tax refunds and the rate charged for late-paid taxes.

The base rate, which is the actual prescribed rate, applies to taxable benefits for employees and shareholders from interest-free and low-interest loans and other related-party transactions.

The rate for tax refunds is two percentage points higher than the base rate, meaning that if the CRA owes you money, the rate of interest will be five per cent. But filing your 2025 tax return early won’t necessarily get you that rate on your refund because the CRA only pays refund interest on amounts it owes you after May 30, assuming you filed by the deadline. Any refund interest you do happen to receive is taxable.

If you owe the CRA money, which could happen if you haven’t fully paid your balance due on your 2025 tax return by the April 30, 2026 deadline, or if you’re late or deficient in one of your quarterly instalments, then the rate the CRA charges is a full four percentage points higher than the base rate. This puts the interest rate on tax debts, penalties, insufficient instalments, unpaid income tax, Canada Pension Plan contributions and Employment Insurance premiums at a relatively high seven per cent.

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Keep in mind that this interest is compounded daily and is not tax deductible. For example, if you’re a resident of Newfoundland and Labrador and in the highest 2026 tax bracket of nearly 55 per cent, that means you’d have to find an investment that earns a guaranteed, pre-tax rate of return of more than 15 per cent to be better off than paying down your tax debt.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning at CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com .

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