MAKING TAX INSTALLMENTS WILL HAVE YOU COMING UP ROSES

Originally published on February 17, 2011

 

No one enjoys paying their income taxes but farmers are often considered to be particularly tax averse.
They would much rather buy farm inputs or equipment in hopes that the resulting tax shield will be sufficient enough to cover off their tax obligations.
For this reason, the idea of making monthly corporate tax installments in advance is akin to living in an alternative universe.
The Canada Revenue Agency requires corporations to pay monthly installments of their estimated taxes payable before the corporation’s balance- due day, which is generally three months after the end of the company’s taxation year.
The agency will charge taxpayers interest if these installments are not made, but unlike most forms of interest, it is not tax deductible.
The CRA sets the interest on a quarterly basis. Taxpayers have three
options when determining their monthly installment amount:
• estimate their taxes payable for the coming year and divide it by 12;
• divide their preceding year’s taxes payable by 12;
• make their first two months of installment payments as one twelfth
of their second preceding year’s tax payable and the next 10 months of installments calculated at one-tenth of their preceding year’s tax payable.  I think farmers are more worried about whether installments should
be paid at all rather than which installment option generates the
lowest monthly amount.
What is the cost of not making installment payments?
 

 

The CRA charged interest on overdue installments for all four quarters
of 2010 at a rate of five percent, which was compounded daily.
It would also have charged an installment shortfall penalty of 50
percent of all interest on deficient installments for the year if corporate
taxes payable exceeded $40,000.
This translated into a CRA cost of borrowing of 5.917 percent for many
farmers who did not make their required installments.
Many farmers wonder whether they should use their operating line
of credit to make corporate tax installments.
Farmers who did this last year reduced their CRA cost of borrowing
to 4.275 percent from 5.917 percent.
This difference of 1.573 percent of their 2010 taxes payable ended up in
their pockets, which can be used for other things.
Put another way, since I’m an advocate   for corporate tax installments, I’ve had my best success in convincing clients by appealing to their
romantic side.
My mantra is that if you make your 2011 corporate tax installments, you
can give your wife a year’s worth of flowers for free.
So far it’s been working.
Either farmers are the ultimate romantics or they simply prefer writing
12 small cheques over the course of the year rather than one large cheque at the end.

Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.