CRA Tax Instalments: Who Pays, the Three Options and What Underpaying Costs
You must pay income tax by instalments for 2026 if your net tax owing is more than $3,000 ($1,800 in Quebec) for 2026 and also for either 2025 or 2024. The payments are due on March 15, June 15, September 15 and December 15, and you choose one of three ways to size them. If you pay the no-calculation or prior-year amounts in full and on time, the CRA charges no instalment interest, even when your actual bill turns out larger; the current-year option is protected only if your estimate is not too low. If you do not, interest runs at 7% (the 2026 prescribed rate), compounded daily. A freelancer whose profit rises from $50,000 to $75,000 and who pays nothing would owe about $621 of instalment interest by April 30, 2027, on top of the tax itself. This guide runs the CRA's calculation chart line by line, compares the options with that example, and works out the interest. The charge falls on the days the money was late, not on the size of the bill, which is why the first instalment is the one that costs most.
The test counts income tax, not CPP
The $3,000 line is applied to net tax owing, and the CRA's chart builds that number from the return's tax lines and credits only. Net tax owing is the total of net federal tax (line 42000), social benefits repayment (line 42200), provincial or territorial tax (line 42800) and Yukon First Nations tax (line 43200), minus the credits that follow: tax already deducted (line 43700), refundable abatements, the Canada workers benefit, several refundable credits and the provincial credits on line 47900. CPP contributions payable on self-employment income (line 42100) and voluntary EI premiums (line 42120) are explicitly not part of net tax owing. The chart adds them after line 21 to get the total instalment amount.
That ordering has a consequence for small businesses. A sole proprietor in Ontario with $30,000 of net profit owes $2,455 of income tax in the 2026 model used on this site and $3,154 of CPP, a bill of $5,609. The test looks only at the $2,455, which is below $3,000, so no instalments are required. The tax passes $3,000 at a profit of about $33,250 in Ontario, $36,290 in Alberta and $36,660 in BC.
| Net business income, no other income | Income tax (Ontario) | CPP and CPP2 | Instalments required? |
|---|---|---|---|
| $30,000 | $2,455 | $3,154 | No, tax is under $3,000 |
| $33,250 | $3,000 | $3,540 | Borderline |
| $40,000 | $4,221 | $4,344 | Yes, if also over $3,000 in 2025 or 2024 |
| $75,000 | $11,719 | $8,493 | Yes, if also over $3,000 in 2025 or 2024 |
Tax already deducted at source counts as a credit, which is why employees with a side business often avoid instalments altogether. The CRA's own example is Hugh, a resident of Alberta whose net tax owing had been $3,500 for years. In January 2026 he asked his pension plan administrator to withhold an extra $250 a month using Form TD1. He now estimates $500 of net tax owing and does not have to pay instalments for 2026, so he can ignore the reminders. The same trick is available for OAS (whose own recovery tax is covered in the OAS clawback guide), CPP benefits, EI and employer-pension income, including RRIF payments above the minimum described in the RRIF guide, and the CRA lists the forms (ISP3520OAS and ISP3520CPP, or the TD1 for an employer or pension plan). It is not available for self-employment, investment or rental income, or capital gains, because tax cannot be withheld from those.
Freelancers and gig workers, the readers of the self-employed, gig and seller math hub, usually meet these rules in their second year, and the set-aside guide gives the size of the bill that the payments cover. The Quebec thresholds are lower, $1,800, and farmers and fishers whose main income is farming or fishing have a single payment date and their own rule. This guide deals with the standard case of four payments.
The three-year test, in a table
The requirement uses two tests together: net tax owing over the line in the current year and in one of the two preceding years. Here is how a new business moves through them. Suppose someone works as an employee in 2025 with tax correctly withheld, starts freelancing on January 1, 2026, and has a profit of $75,000 in 2026 and $80,000 in 2027.
| Year | Net tax owing | Over $3,000? | Instalments required for that year? |
|---|---|---|---|
| 2024 | $0 | No | n/a |
| 2025 | $0 (withheld) | No | n/a |
| 2026 | $11,719 | Yes | No, because neither 2025 nor 2024 was over the line |
| 2027 | about $13,233 | Yes | Yes, because 2026 was over the line |
The first year of a business is therefore the one year when a large bill arrives with no instalments at all. It is also the year with no history for a prior-year option, so the sensible habit is to set the money aside as if instalments were due, and to expect them the next year.
The CRA chart, line by line
The income tax lines that feed the chart come from the return itself; the income tax brackets guide shows how the federal and provincial brackets produce them.
The calculation chart for 2026 is a two-page form, and it produces the one number each option needs.
| Chart line | What goes there |
|---|---|
| 1 to 4 | Net federal tax (42000), social benefits repayment (42200), provincial or territorial tax (42800), Yukon First Nations tax (43200) |
| 5 | Total payable (lines 1 to 4) |
| 6 to 19 | Credits: tax deducted (43700, or 43850 in Quebec), refundable abatements, medical expense supplement, Canada workers benefit, training credit and others |
| 20 | Total credits |
| 21 | Net tax owing (line 5 minus line 20). If it is $3,000 or less ($1,800 in Quebec), no instalments are required |
| 22 | CPP contributions payable on self-employment and other earnings (42100) |
| 23 | EI premiums payable on self-employment and other eligible earnings (42120) |
| 24 | Total amount due (lines 21 to 23) |
Line 24 divided by four is the amount of each instalment on March 15, June 15, September 15 and December 15. If your reminder only covers September and December, you pay 75% of line 24 on September 15 and 25% on December 15. A farmer or fisher pays 66% of line 24 once, on December 31.
For the prior-year option you fill in the chart from your 2025 return. For the current-year option you use estimates for 2026. The no-calculation option skips the chart: the CRA works out the amount from your latest assessed return and prints it on the reminder.
The reminders and the calendar
The CRA sends two reminders on form INNS1. The February reminder covers the March and June payments, and the August reminder covers the September and December ones. You can view them online in your CRA account. If you received a reminder but your 2026 net tax owing is $3,000 or less ($1,800 or less in Quebec), you do not have to pay instalments for 2026. If you received only the August reminder, you can reduce or stop your payments if instalments already paid will cover your estimated 2026 net tax owing, or if your 2026 net tax owing will be $3,000 or less.
A due date that falls on a weekend or a CRA-recognized public holiday is met if the payment arrives on the next business day. Sunday, March 15, 2026, for example, would be met by a payment on Monday, March 16. Instalment interest, as described below, is charged only if you received a reminder that shows an amount to pay.
Three options for one freelancer
Take a sole proprietor in Ontario whose profit was $50,000 in 2025 and 2024 and is expected to be $75,000 in 2026. The tax and CPP bills from the set-aside guide are $11,495 for a $50,000 profit and $20,212 for $75,000.
| No-calculation | Prior-year | Current-year | |
|---|---|---|---|
| Where the amount comes from | The CRA, from the latest assessed return | You, from your 2025 return | You, from your 2026 estimate |
| Total for the year | about $11,495 (the 2024 return is the same here) | $11,495 | $20,212 |
| Each of four instalments | about $2,874 | $2,874 | $5,053 |
| Balance still due at tax time | $8,717 | $8,717 | $0 |
| Instalment interest if paid in full and on time | none | none | none (unless the estimate is too low) |
The first two options leave a bill of $8,717 for April 2027, but the CRA charges no instalment interest on it, because the instalments were paid in the amounts the rules allow. The CRA says the prior-year and current-year options carry no interest or penalty when paid in full by the due dates, unless the estimates are too low. The cost of that choice is not interest. It is cash flow: the balance has to be there at tax time.
The current-year option is the most accurate and the most work, because it requires an estimate of the whole year's profit in March. The no-calculation option is the least work and is best, in the CRA's words, if your income, deductions and credits stay about the same from year to year.
What underpaying costs
Interest is not a flat charge. The CRA works it out as the difference between two interest figures.
- A: the interest on each instalment you should have paid, from its due date to your balance due date, using whichever of the three options gives the least interest.
- B: the interest on each instalment you did pay, from the day it was paid, or from January 1 if later, to the balance due date.
- Charge: A minus B, only if it is more than $25.
The rate is the prescribed rate for overdue taxes, which the CRA published as 7% for each quarter of 2026, and it is compounded daily. The CRA pays non-corporate taxpayers 5% on overpayments. Assuming that the 7% rate holds into 2027 and a balance due date of April 30, 2027, the interest on one $2,873.79 instalment, which is a quarter of the $11,495 prior-year total, is as follows.
| Instalment | Due | Days to April 30, 2027 | Interest at 7%, compounded daily |
|---|---|---|---|
| 1 | March 15, 2026 | 411 | $235.66 |
| 2 | June 15, 2026 | 319 | $181.28 |
| 3 | September 15, 2026 | 227 | $127.86 |
| 4 | December 15, 2026 | 136 | $75.93 |
| All four | $620.74 |
Because A uses the option with the least interest, the freelancer who pays nothing is charged on the $11,495 prior-year amount, not on the $20,212 that is actually owed, which gives $620.74. A freelancer who pays the first two instalments and skips the last two owes $203.79 (that is $127.86 plus $75.93). On the current-year amounts, the numbers would be about 76% higher, but the CRA does not use them when a lower option is available.
A penalty is added only if the instalment interest for the year is more than $1,000. In that case the CRA takes the greater of $1,000 and 25% of the interest you would have owed with no instalments, subtracts it from your actual interest, and halves the result. The CRA's example is John, whose actual interest is $2,500 and whose no-instalment interest would have been $3,200. The 25% figure is $800, the flat $1,000 is higher, and the penalty is ($2,500 minus $1,000) divided by two, which is $750. For the freelancer in the table the interest is $620.74, so no penalty applies.
The price of lateness, per $1,000
The same 7% daily compounding applies to a late instalment and to a balance that is paid after the balance due date. A rule of thumb helps with both: the interest on $1,000 at 7% compounded daily is about $5.77 for 30 days, $11.57 for 60 days, $17.41 for 90 days, $35.12 for 180 days and $72.50 for a full year. On the $8,717 balance in the freelancer example, paying 30 days late costs about $50 and paying 61 days late about $103. These are modest sums beside the tax itself, and the cost of an instalment mistake grows with the size of the shortfall and the number of days it is outstanding. The big numbers appear only when a large share of the year's tax goes unpaid for most of a year, as in the pay-nothing example above.
The comparison to remember is how little overpaying earns. Instalment interest is charged at 7%, and the CRA published 5% as the rate it pays non-corporate taxpayers on overpayments. But money overpaid in instalments does not earn that rate as a refund: the CRA says instalment credit interest is not refundable and can only be used against instalment interest for the same tax year. Underpaying costs interest and overpaying earns almost nothing, which is the reason to aim at the prior-year amount in a growth year and not at a large overpayment.
Paying late, or paying only part
The A minus B rule makes small slips cheap and large gaps costly. Using the same four instalments of $2,873.79 and a 7% rate, the charge is the interest on the days the money was missing.
| What happened | Instalment interest charged |
|---|---|
| One instalment paid 30 days late | $17.84, under the $25 floor, so nothing is charged |
| All four paid 10 days late | $23.21, also under the floor |
| All four paid 30 days late | $69.50 |
| All four paid 60 days late | $138.60 |
| Half of each instalment paid on time, nothing else | $310.37 |
| Nothing paid | $620.74 |
The floor means a slip of a few days costs nothing, while a pattern of lateness adds up. Paying part is charged in proportion: half the money missing is half the interest. If you are behind, the CRA lets you offset instalment interest by overpaying the next instalment or paying it early. The credit this earns is explained in the lateness section above. A person who finds in November that the September payment was short can pay the December amount early to offset part of September's interest.
When profit falls
The prior-year option is the right one when this year looks like last year. It is the wrong one when income drops. Take the same sole proprietor in Ontario, with a $75,000 profit in 2025 and an expected $40,000 in 2026.
| Prior-year option | Current-year option | |
|---|---|---|
| Basis | 2025 return: $20,212 | 2026 estimate: $8,565 |
| Each of four instalments | $5,053 | $2,141 |
| Total paid by December 15 | $20,212 | $8,565 |
| Actual 2026 bill | $8,565 | $8,565 |
| Overpaid, to be refunded after filing | $11,647 | $0 |
Both options avoid instalment interest, since the full amounts are paid on time. The prior-year option ties up $11,647 for months until the return is assessed, so the current-year option is better for cash flow in a year when income falls, provided the estimate is honest. The estimate has to be realistic, because the CRA's protection against interest applies only when the estimated instalments are not too low. If the profit then rebounds to $60,000, the current-year option will have under-estimated.
The second year, walked through
Return to the person who started freelancing in 2026 with a $75,000 profit and no instalments. In 2027 the profit is $80,000. Both tests are now met: net tax owing is over $3,000 in 2027, and 2026 was also over the line. The February 2027 reminder arrives, and the options look like this.
| Prior-year option | Current-year option | |
|---|---|---|
| Basis | 2026 return: $20,212 | 2027 estimate: $22,126 |
| Each instalment | $5,053 | $5,531.50 |
| Balance due after filing for 2027 | $1,914 | $0 |
A bill of $22,126 is $13,233 of income tax and $8,893 of CPP and CPP2, from the same model as the set-aside guide. Choosing the prior-year option means every instalment is the same $5,053, and the shortfall is a modest $1,914 in April 2028. The current-year option asks for $478.50 more per instalment and leaves nothing at tax time. Both avoid instalment interest if paid in full and on time.
Choosing an option from the pattern of your income
The right option depends on the shape of your last three years, and the CRA's descriptions map onto four simple cases.
| Pattern | Best fit | Why |
|---|---|---|
| Steady from year to year | No-calculation | The CRA does the arithmetic and the amount will be close |
| Rising, and this year is like last year | Prior-year | The amount is known and interest-free, and the shortfall is cash you hold |
| Falling sharply | Current-year | Avoids overpaying instalments that are refunded later |
| Lumpy or unpredictable | Prior-year, with extra saved | Interest protection comes from the prior-year amount, and the extra is yours to hold |
For a lumpy year, the safest figure to pay is the prior-year option, and the safest figure to save is the tiered set-aside from the earlier guide. They are different numbers for different purposes: one satisfies the CRA, the other pays the bill.
A calendar and a plan
| When | What to do |
|---|---|
| January | Estimate the year's profit and the bill; open a separate account |
| February | Read the reminder; choose an option; fill in the chart for the prior-year or current-year option |
| March 15 and June 15 | First and second instalments |
| August | Read the second reminder; compare year-to-date profit with the estimate |
| September 15 and December 15 | Third and fourth instalments (75% and 25% if the reminder covers only these two) |
| After filing | Pay the balance by the balance due date to stop interest |
A person who is not yet required to pay, as in a first year, can still pay voluntarily, which spreads the cost across the year. The sums that are still owing in April are sized with the tiers in how much to set aside when self-employed.
Sources
- CRA, "Income tax instalments for individuals": who pays, due dates, reminders: https://www.canada.ca/en/revenue-agency/services/payments/payments-cra/individual-payments/income-tax-instalments/who-pays-instalments.html and https://www.canada.ca/en/revenue-agency/services/payments/payments-cra/individual-payments/income-tax-instalments/due-dates.html (checked October 23, 2026)
- CRA, "Options to calculate" (no-calculation, prior-year and current-year options; reducing or eliminating instalments; Hugh's example): https://www.canada.ca/en/revenue-agency/services/payments/payments-cra/individual-payments/income-tax-instalments/options-calculate.html (checked October 23, 2026)
- CRA, "Interest and penalty charges" (daily compounding, the A minus B calculation, the $25 floor, penalty rule and John's example, credit interest): https://www.canada.ca/en/revenue-agency/services/payments/payments-cra/individual-payments/income-tax-instalments/interest-penalty-charges.html (checked October 23, 2026)
- CRA, Calculation chart for instalment payments for 2026 (lines 1 to 24, divided by four, 75% and 25% split, farmers and fishers at 66%): https://www.canada.ca/content/dam/cra-arc/migration/cra-arc/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/Instalment-chart-fill-26e.pdf (checked October 23, 2026)
- CRA, prescribed interest rates for the first to fourth calendar quarters of 2026 (7% on overdue amounts, 5% on non-corporate overpayments): https://www.canada.ca/en/revenue-agency/services/tax/prescribed-interest-rates.html (checked October 23, 2026)
- Income tax and CPP figures come from the site's T4127-based model for an Ontario resident with basic amounts. The interest figures assume the 7% rate continues and a balance due date of April 30, 2027.