Self-employed Canadians do not have an employer withholding income tax from each payment. CRA addresses this by requiring quarterly installment payments once your tax owing exceeds a threshold. Many self-employed professionals encounter installments for the first time after a strong income year and are surprised by the obligation and the interest that accrues when payments are late or missed.
When Installments Are Required
You are required to make quarterly installments if your net tax owing exceeds CAD $3,000 in the current year and in at least one of the two preceding years. For Quebec residents, the provincial threshold is CAD $1,800.
Net tax owing includes federal and provincial income tax, CPP contributions on self-employment income, and voluntary EI premiums. It does not include GST/HST, which has its own remittance schedule.
If you have net tax owing above CAD $3,000 for the first time this year but not in either of the two prior years, installments are not required for this year. The requirement kicks in when the threshold is met in the current year and at least one prior year.
Due Dates
Quarterly installments are due on:
- March 15
- June 15
- September 15
- December 15
Each installment is one quarter of your total estimated annual tax owing. If you miss a due date or underpay, CRA charges interest from that date.
Three Calculation Methods
CRA allows three methods for calculating installments. Each has different accuracy and risk profiles.
Method 1: No-Calculation Method
CRA sends installment reminders in February and August with amounts calculated based on your prior year’s tax return. If you pay exactly what CRA asks, on time, you are protected from installment interest even if the amounts undershoot your actual current-year liability.
This method requires no calculation. It is the lowest-risk approach for most people. The main downside is that if your income has increased significantly, the payments may not cover your actual liability and you will owe a large balance on April 30.
Method 2: Prior-Year Method
Pay quarterly amounts equal to one quarter of your total net tax owing from the prior year. If you pay this amount on time and in full, you are protected from installment interest regardless of whether your current-year income is higher.
This method also qualifies for safe harbour. A mortgage agent who owed CAD $38,000 in the prior year would pay CAD $9,500 per quarter. If their current-year liability turns out to be CAD $52,000, they still owe the difference by April 30 but no installment interest accrues.
Method 3: Current-Year Method
Estimate your current-year income and calculate actual tax owing. Pay installments based on that estimate.
This method is the most accurate but carries the highest risk. If your estimate is too low, interest accrues from each due date on the shortfall. It is most useful when your income has dropped significantly from the prior year and you want to reduce installment amounts.
Interest and Penalties
Installment interest compounds daily at CRA’s prescribed quarterly rate, which changes each quarter. Interest accrues from each missed or underpaid installment due date.
A penalty applies when annual installment interest exceeds CAD $1,000. The penalty is 50% of the lesser of: the interest charged, or the interest that would have accrued using the no-calculation or prior-year method. The penalty is in addition to, not instead of, the interest.
Installment interest is not deductible. There is no business expense treatment for this cost.
Worked Example
An IT contractor had CAD $95,000 in net income in 2024, resulting in total net tax owing of CAD $38,000 (including CPP contributions). Using the prior-year method for 2025, they pay CAD $9,500 per quarter on March 15, June 15, September 15, and December 15.
If their 2025 net income is CAD $110,000 and their actual liability is CAD $46,000, they owe the CAD $8,000 difference by April 30, 2026, but no installment interest applies. If the balance is not paid by April 30, interest and late payment penalties begin to accrue.
Practical Considerations
If your income is relatively stable year to year, the no-calculation method (paying CRA’s reminder amounts) is usually the simplest approach. It requires no analysis and provides safe harbour.
If your income has dropped significantly, the current-year method reduces cash flow cost, but requires careful estimation and carries interest risk.
Set aside approximately 30% to 35% of net self-employment income in a separate account throughout the year. This ensures you have the funds available for installments and the April 30 balance owing.
Instalment obligations are easiest to manage when reviewed alongside the annual income projection. For IT contractors whose income has changed significantly from the prior year, working with a CPA who can estimate the current-year liability and select the method that fits the situation reduces both the risk of underpayment interest and the cash flow cost of unnecessary overpayment.