Withholding, Instalments, and the Bonus That Triggers Interest
Samuel, 52, is a self-employed consultant in Alberta. His 2024 net tax owing was $38,000. For 2025 he projects net tax of $61,000 because of a large Q4 contract. He has paid no instalments and has not set aside cash; he planned to pay in April 2026. His spouse has $18,000 of TFSA room and he has $9,000. He also received a $12,000 eligible dividend from a private company in 2025 and is unsure whether it changes his instalment obligation. He asks whether he can simply wait until filing to settle up.
1. Determine whether Samuel is required to pay instalments for 2025 and what the consequences of waiting are.
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Instalments are required when net tax owing exceeds $3,000 in the current year and in either of the two prior years. Samuel owed $38,000 in 2024 and projects $61,000 in 2025, so he is squarely in the instalment system. The threshold is met in both the current and prior year, so the requirement is not optional.
Waiting until April 2026 exposes him to instalment interest, compounded daily, calculated on the shortfall from each quarterly due date. Interest is not deductible. If the interest exceeds $1,000, a penalty of 50% of the interest can apply. On a $61,000 liability paid entirely in April, the interest charge could run into the low thousands.
The eligible dividend does not create a separate instalment obligation, but it increases net tax owing and therefore the required instalment amount. He should recalculate using the current-year option, which allows instalments based on estimated 2025 tax rather than the prior-year amount.
2. Recommend an instalment method and a cash-management plan given his lack of reserves.
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Three methods exist: prior-year (pay 2024's $38,000 in quarterly instalments), current-year (estimate 2025's $61,000 and pay in four equal parts of $15,250), or the hybrid the rules allow - prior-year for the first two quarters and current-year for the last two, which caps interest if income rises late in the year.
Because Samuel's income is back-loaded into Q4, the hybrid is the best fit: he pays $9,500 in each of the first two quarters and then catches up in the last two based on actual income. That minimizes interest without overpaying early.
Cash management: open a separate tax reserve account and transfer 30-35% of every invoice payment into it immediately. With $61,000 of projected tax and no reserves, he is one late client payment from a compounding interest problem. The $9,000 TFSA should not be used for tax reserves - it is his only liquidity buffer; instead, build the reserve from the Q4 contract proceeds before any discretionary spending.