Introduction

Corporate income tax is not paid once a year at filing time — it is paid in monthly instalments throughout the year, with any remaining balance due shortly after the fiscal year ends. Many incorporated business owners discover this only after they have already missed several payments and received a CRA instalment reminder notice with interest charges attached.

Scenario: Meridian Media Corp Ignores Its Instalment Obligations

Meridian Media Corp has a December 31 fiscal year end. In 2025, the corporation paid $38,000 in corporate tax. Based on the prior year's liability, the CRA expects monthly instalments of approximately $3,167 throughout 2026.

The corporation's owner, focused on a large product launch, paid no instalments in 2026. By December 31, 2026, the corporation owes the full $38,000 — which it pays at the February 28 balance-due date. No instalment was ever sent.

What the CRA Charges

The CRA charges instalment interest at the prescribed rate — currently 9% annually (2026), compounded daily — on the shortfall between the required instalments and the amounts actually paid, calculated from each instalment due date.

Paying the full year's tax in February is not equivalent to paying it in monthly instalments throughout the year. The interest accrues on each monthly shortfall from the date it was due. For Meridian Media, missing twelve monthly instalments of $3,167 produces instalment interest of approximately $1,780 — unavoidable regardless of when the annual balance is paid.

This is not a penalty. It is interest — and unlike many CRA penalties, it cannot be waived through taxpayer relief unless extraordinary circumstances apply.

The Three Instalment Methods

A corporation can calculate its instalment obligation using one of three methods:

Method 1 — Prior year: Pay one-twelfth of the prior year's tax liability each month. For Meridian, that is $3,167/month based on the $38,000 2025 liability. This is the simplest method and is safe if the current year's tax will be similar to or higher than the prior year.

Method 2 — Current year estimate: Estimate the current year's tax liability and pay one-twelfth monthly. If the estimate is accurate, no shortfall arises. If the estimate is too low, interest accrues on the shortfall. This method is beneficial when current-year income is significantly lower than the prior year.

Method 3 — Two-year prior hybrid: The first two instalments are based on the second prior year; the remaining ten are based on the first prior year. This method is useful when the second prior year's liability was lower and the prior year's was anomalously high.

The corporation selects the method that minimises its instalments — paying no more than necessary while avoiding shortfall interest.

What Happens After a Missed Instalment

The CRA does not immediately contact the corporation after a missed instalment. Interest accrues silently. At filing time, when the T2 is prepared and the final tax liability is determined, the CPA calculates the instalment interest owing and it appears on the assessment.

There is no way to retroactively avoid instalment interest once the due dates have passed. The only mitigation is paying the missed amounts as quickly as possible after discovering the obligation — each day of delay adds to the daily-compounding interest.

The Bright Side of Overpayment

The same prescribed interest rate that applies to underpayment also applies to overpayment — in the corporation's favour. A corporation that overpays its instalments receives interest from the CRA on the excess at the prescribed rate. In a year where income is higher than expected, overpaying the final instalments to ensure no shortfall is a conservative strategy with a modest upside (CRA interest credit) if the overestimate turns out to be accurate.

When to Speak With a CPA

Instalment planning should be part of the quarterly corporate review — not a surprise at year end. A CPA can determine the optimal instalment method at the beginning of each fiscal year, model the current-year income estimate, and adjust instalment amounts quarterly as the year's results become clearer.

Rotaru CPA manages corporate instalment planning for incorporated clients as part of year-round tax compliance. Book a consultation to review your instalment obligations.