If you've recently received your March reminder from the Canada Revenue Agency notifying you your first 2009 quarterly tax instalment payment is due, you may want to consider a few things before paying it.
Investors who lost money in the market in 2008 are looking forward to a fat tax refund this spring when they reap the rewards of their December tax-loss selling.
Under the Income Tax Act, quarterly tax instalments are required for 2009 if your "net tax owing" this year will be more than $3,000 ($1,800 for Quebecers) and also greater than $3,000 in either 2008 or 2007. The definition of net tax owing is complex, but essentially refers to your net federal and provincial taxes, less income tax withheld at source.
Income that is not taxed at source, such as that from self-employment, investments, rental income or capital gains, are most likely to be affected.
So, should you send your payment in March? There are three methods for determining the amount you owe in instalments for 2009: the no-calculation method, the prior-year method and the current-year method.
With the no-calculation option, the CRA calculates your March and June instalments based on 25% of the net tax owing on your 2007 assessed return. The Sept. 15 and Dec. 15 instalments are calculated based on the net tax owing from your 2008 return (due April 30 or June 15 for the self-employed), less the March and June instalments already paid.
If you follow the no-calculation method and pay on time, no interest or penalties will be assessed by the CRA, even if you end up owing more money when you file your 2009 return next year.
The prior-year option bases the calculation on your 2008 income, not on a combination of 2007 and 2006. You calculate your 2009 instalments based on your 2008 tax owing, and pay 25% of the amount on each instalment date. If you've realized capital losses in 2008, but had significant gains in 2007, the prior-year option may be the best method.
Finally, under the current-year method, you are entitled to base your 2009 instalments on the amount of estimated tax owing for 2009. You pay one-quarter of that amount on each of the four instalment dates. This can be helpful if you are carrying forward capital losses from 2008 which you may apply against any 2009 gains you might be realizing this year. A word of caution: If the amount owing is greater than what you estimated, you may be subject to instalment interest and penalties.