The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, are due or coming due. The RRSP deadline of February 29, 2016 is approaching, and the May 2, 2016 deadline for payment of any final balance of 2015 income taxes owed is not far behind.

As if that series of financial hits wasn’t enough, many Canadians must also contend with an instalment reminder received from the Canada Revenue Agency (CRA) around the middle of February. While many of those who receive such reminders are already familiar with the tax instalment process, that doesn’t make the reminder any more welcome. For others, the idea of paying taxes by instalment is unfamiliar and often puzzling.

For most Canadians, income taxes they owe are deducted by their employer from their paycheques and remitted to the CRA on their behalf. While that system is efficient, it’s also largely invisible to the individual employee/taxpayer. Consequently, taxpayers, especially the newly retired, are sometimes surprised to find that they must make arrangements to ensure that taxes are paid throughout the year, in order to avoid having a large tax balance owed when the return for 2015 is filed in the spring of 2016.

The instalment payment system is one way in which those taxes can be paid throughout the year. Generally, a taxpayer will receive an instalment reminder when deductions made at source (that is, deductions made by the payor and remitted on the individual payee’s behalf to the CRA) are not made at all (as in the case of self-employment income) or are not sufficient to cover the individual’s income tax bill for the year (as often occurs with retirees, especially the newly retired). However, no matter what kind of income one receives, or the reason that sufficient tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

 Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax which was or will be owed on filing is more than $3,000 for the current year (2016) and either of the two previous years (2014 or 2015). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are then due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2016 will specify two amounts—one to be paid by March 15, and the other to be paid by June 15. Each of these amounts represents the Agency’s best estimate, based on the taxpayer’s return filed for the 2014 taxation year, of one quarter of the net tax will which be payable by the taxpayer for 2016. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. A taxpayer who chooses this option can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2016 tax year. If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2016, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2015 tax year. Where a taxpayer’s income has not changed significantly between 2015 and 2016, and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2016 will be slightly less than it was in 2015. That reduction in tax payable results from both the lowering (from 22% to 20.5%) of a federal individual income tax rate for 2016 and from the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2016 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2015 to 2016 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2016 tax year is filed in the spring of 2017. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2016—until March 31, 2016—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to have to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.