Sole Proprietor Tax Installments

by Jon

CRA website information on paying tax instalments

CRA website information on paying tax instalments

Hi there..great site...

Quick question regarding Sole Proprietorship.

On one of your pages you mention "when you start making enough money the CRA will be asking you to make tax instalments". I was confused by that line.

Right now I am a website operator and make money from advertisers. I have no employees or anything. I just deposit my cheques into my small business bank account and nothing more.

Right now I will be making about $40,000 this year. None of it has been taxed yet.

So when I file my tax return, do I do it on my own personal return (as you mentioned) disclosing the details of this extra income? I obviously expect to be charged income tax on the income I income I earned online. Wouldn't I just pay them a cheque when I file my annual T1 income tax return?

Would I still get charged income tax that I must pay in installments despite paying it on my income tax return filing when I file my return each year?

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Hi Jon,

I had to go searching for the quote so I could read what I said in context.

Using the search box, I found 2 spots on my website (sheesh I even forgot I had some of this information on my site!) where I talked about paying tax instalments if you are self-employed.

The first reference was located on The Bookkeeper's Tips page when discussing how to record the owner's draw in your books.

It stated, "At some point, you will be making enough income that CRA will send you a notice informing you that you will have to begin paying tax installments. (They calculate the amount owing for you so you don't have to.)

This requirement kicks in when you expect to earn more than $3,000 in the current year and have earned over $3,000 in either of the past 2 years."

I also found reference information I posted from the CRA website. The page is titled CRA Self-Employment Tax Instalments.

In this chat I give a reference from Evelyn Jacks of the Knowledge Bureau explaining how to minimize the instalmlent amount.

As you can see, I found your quote on The Bookkeeper's Tips page.

The first thing I need to point out are my typing mistakes! :0(

It should read "when you expect to owe more than $3,000 in net tax owing in the current year and have paid over $3,000 in net tax owing in either of the past 2 years".

So the trigger for paying instalments is the amount of tax due/paid on your annual tax return over the past over the last three years.

On the CRA website under Individuals> Tax return> Tax payments> Paying your tax by instaments> Who has to pay tax by instalments?, they have their excellent interactive Q&A features where you answer a few questions to help you determine whether you pay by instalment.

If you do have to pay by instalment, CRA generally sends you a notice explaining when you have to start and how much you have to pay.

In your instance, a couple of things to remember.

1. You are NOT paying income tax on your gross income but on your NET income or profit. Click here to read more on this topic.

2. You report this income on Tax Form T2125. Click here to read more on how to complete this form and what deductions you are allowed.

3. As you operate a website, you might be interested in how to record your web related outlays. Click here to read more on this subject.

4. Online income is taxed the same way as traditional commerce income. Click here to read more more about this topic.

Thanks you so much for asking this question Jon. You were right to be confused about that information.

I apologize for the error. :0( I do aim for accuracy but as I have no one to proof read but myself. Sometimes I mess up ... which is why you should always check with your accountant before implementing anything based on the information on this site.

I have now corrected my typing errors. Thanks so much for your question. :0)

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Comments for Sole Proprietor Tax Installments

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Feb 25, 2016
Recording Payment of Income Tax
by: Annie, N. Vancouver

I'm new to the world of Canadian Bookkeeping with my degree in Management Accounting and experience in South Africa and the UK.

My client is a sole proprietor. She paid income tax for the first time in 2015 (based on 2014 Tax return submission)This was paid from her business bank account. (this may be the first problem) If I record it as an expense on the 2015 income statement it reduces that years profits even though the tax relates to 2014 and in fact includes rental income unrelated to her business.

Should I have created an Income Tax Payable liability on the 2014 Balance sheet? This would have been difficult to do as it was her first year of business. Thanks for your help.

Feb 25, 2016
by: Lake

Because she is a sole proprietor, you record her payment of income tax as a personal draw.

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