Tax instalments for self-employed Albertans, without the guesswork.

Tax instalments catch a lot of self-employed people off guard. You file your return, pay what you owe, and a few months later a letter from CRA asks you to start paying next year's tax in advance. If you're self-employed, tax instalments in Alberta follow the same federal rules as everywhere else in Canada (except Quebec), and once you understand the logic they're easy to plan for.

This guide covers who has to pay, the three ways to calculate your payments, the due dates, and what happens if you miss one. It's written for sole proprietors in Edmonton, St. Albert, Sherwood Park, Leduc and the rest of the capital region. If you're incorporated, your corporation has its own instalment rules, so talk to your accountant about those.

1Who has to pay tax instalments in Alberta

When you're an employee, your employer withholds tax from every paycheque. When you're self-employed, nobody does. CRA's answer is instalments: four payments a year so you're paying as you earn, not all at once in April.

You have to pay instalments when your net tax owing is more than $3,000 in the current year and was more than $3,000 in either of the two previous years. Net tax owing is roughly your federal and Alberta income tax, plus CPP contributions on self-employment income, minus any tax already withheld at source.

That second part matters. If you go from employee to self-employed this year, CRA has no history to send you reminders on, so you may not hear about instalments until your second year. That's often when the first big bill lands.

2The four instalment due dates

For individuals, instalments are due on the 15th of the last month of each quarter. Tap each one once it's paid.

Tap a date once that payment has gone through.

If a due date falls on a Saturday, Sunday or public holiday, CRA treats a payment received on the next business day as on time. Online banking payments can take a day or two to arrive, so don't leave it until the evening of the 15th.

These dates are separate from your annual deadlines. As a self-employed person you file by June 15 but must pay any balance by April 30. Instalments are paid during the year; whatever is left over is settled when you file.

3The three ways to calculate your instalments

CRA lets you choose the method that suits you. You can even switch methods during the year, though that's worth doing carefully.

The no-calculation option, in practice

Say you're a hairstylist renting a chair on Whyte Ave. Two years ago you owed $4,000 and last year you owed $6,000. Your March and June reminders would be based on the $4,000 year, and your September and December reminders would be set so that the total for the year matches $6,000. Pay those exact amounts by the due dates and you're protected from instalment interest, even if this year turns out to be your best yet.

You'll still owe the difference at tax time, though. Instalments based on old years don't magically cover a big jump in income, so it's smart to set money aside on top of them when business is growing.

The current-year option, with care

If your income has genuinely fallen, say you took six months off or lost a major contract, paying based on this year's estimate can free up cash. The risk is that you guess low. If your actual tax ends up higher than what you paid, CRA calculates interest as if you'd used whichever method gave the smallest required amount. Good bookkeeping makes this option much safer, because you're estimating from real year-to-date numbers instead of a hunch.

4Instalment interest and penalties

If you pay late or pay less than required, CRA charges instalment interest at its prescribed rate, compounded daily, from the due date until you pay or until your balance due date, whichever comes first. The prescribed rate is set each quarter, so confirm the current one on the CRA website.

There's a useful quirk: CRA lets you offset interest. If you pay one instalment late, you can reduce or wipe out the interest by paying the next one early or paying extra. Interest you earn this way can only cancel instalment interest; CRA won't pay it out to you.

When instalment interest for the year gets large, CRA can also add an instalment penalty on top. It only kicks in above a certain amount of interest, so most people who are a little late never see it. People who skip instalments entirely for a year are the ones who do.

5How to plan for instalments without stress

• Set aside a percentage of every deposit. Many self-employed people move 20 to 30% of each payment into a separate tax account. Your accountant can help you pick a number that suits your income.
• Schedule the four payments. Pay through online banking (use CRA's instalment payee, not the balance-owing one) or set up pre-authorized debits in My Account.
• Check your numbers mid-year. Up-to-date books let you see by June whether you're on track or heading for a bigger bill.
• Don't forget GST is separate. If you're registered, GST instalments and income tax instalments are different accounts with different rules. Our guide to GST filing deadlines in Alberta covers the GST side.
• Revisit after big changes. Incorporating, a big new client or a slow year can all change what you should be paying, so recheck whenever your situation shifts.

Instalments get far less stressful when your books are current, because you can see what you've earned and what you owe at any point in the year. We do exactly that for self-employed clients across Edmonton, Spruce Grove, Beaumont and Fort Saskatchewan, on flat monthly pricing. If you'd like a second set of eyes on your instalment plan, book a free 15-minute call.

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.