Corporate Tax Instalments: Who Has to Pay Them

A Canadian corporation has to pay its income tax in instalments once its tax payable, in either the current year or the previous one, rises above the threshold set in the Income Tax Act. Below that amount it pays a single balance after year end. Above it, tax becomes a monthly or quarterly outflow - and nothing arrives in the mail to tell you the switch has happened.

That silence is the entire problem. The obligation attaches by operation of section 157 [1], not by CRA issuing a demand. For most owner-managed corporations the first tangible evidence that instalments were required is a line of instalment interest on the following year's notice of assessment.

The 60-second version

Instalments are triggered by tax payable, not revenue, in the current or preceding year, against a threshold CRA publishes on its corporation instalments page [2].
There are three calculation options under s. 157: current-year estimate, prior-year tax, or the two-years-back hybrid. You pick; CRA does not pick for you.
The first year usually has no instalments, which is why year two feels like a wall: a year-one balance and year-two instalments land together.
Monthly is the default; quarterly is available only to CCPCs that meet the conditions in ss. 157(1.1) to (1.4), including a clean compliance record.
Deficient instalments attract non-deductible interest, compounded daily, plus a further penalty under s. 163.1 if that interest gets large enough [5].
No invoice ever arrives. Treat instalments as a standing calendar item, not a payable you wait to receive.

Who actually has to pay corporate instalments?

The test looks at tax payable, not sales, not profit before adjustments, and not what the bank account looks like. If the corporation's total tax payable for the current taxation year, or for the immediately preceding one, exceeds the amount stated in the Act, instalments are required for the current year. CRA states the current threshold and the exemption conditions on its instalments page [2] and works through the arithmetic in guide T7B-CORP [3]. Deliberately, no dollar figure appears in this article: the numbers change, and a stale one costs more than a missing one.

Two consequences follow from the wording. First, a corporation that was comfortably below the line last year can be required to make instalments this year because this year is going well - the current-year limb of the test is satisfied by the very profit you have not yet reported. Second, tax payable for these purposes includes provincial or territorial tax administered together with the federal tax, so a corporation that looks marginal federally may be over the line once the combined figure is used.

What are the three ways to calculate an instalment?

Section 157 gives a corporation three methods, and it may use whichever produces the smallest payments, provided the method is applied correctly [1].

Option 1 - current-year estimate. Twelve monthly (or four quarterly) payments based on your own estimate of this year's tax payable. This is the cheapest option in a year when profit is falling and the riskiest in every other case: if the estimate turns out low, interest runs from each original due date, not from the day you discovered the shortfall.

Option 2 - preceding year. Payments based on the tax payable for the immediately preceding taxation year. The figure is known and already assessed, so paying it on time is a complete answer to instalment interest even if the current year turns out far more profitable.

Option 3 - the hybrid. The first instalment (monthly filers: the first two months) is based on the tax payable for the year before last, with the remaining instalments based on the preceding year, adjusted for what has already been paid. This exists because the preceding year's return is often not filed by the time the first instalments of the new year come due. For a growing corporation the hybrid is usually the lowest-cash, zero-interest-risk choice.

The practical rule: use option 1 only when you have evidence profit is down and you are prepared to defend the estimate. Otherwise use option 2 or 3, because a known number cannot be wrong.

Does a brand-new corporation pay instalments?

Almost never in its first taxation year. The instalment base looks to the current and preceding years, and a first-year corporation has no preceding-year tax payable to measure. In practice that year's tax is paid as a single balance after year end.

The trap is what happens next. In year two the corporation is now measured against a real preceding year, instalments begin, and they begin at a point in the calendar when the year-one balance is also coming due. A business that spent all of year one's cash on growth - which is what a business in year one does - meets its entire first tax obligation and its first instalment stream inside the same few months. This is why corporate tax deserves a dedicated line in your operating budget and its own row in the cash flow forecast, from the first profitable month, not from the first notice.

Can a small corporation pay quarterly instead of monthly?

Monthly is the statutory default. Subsections 157(1.1) through (1.4) allow a Canadian-controlled private corporation to pay quarterly if it meets the conditions there, which centre on claiming the small business deduction [7], staying under stated taxable income and taxable capital limits, and having what the Act describes as a perfect compliance history over the current and preceding year - no late or missed remittances or filings under the Income Tax Act or the Excise Tax Act during that window.

Read that last condition twice. Eligibility for quarterly instalments is something you can lose by filing a GST/HST return late. When it is lost, the corporation reverts to monthly instalments, and the transition itself creates a cash-flow step change that nobody plans for. The current eligibility conditions are summarized in T7B-CORP [3].

What does it cost to get instalments wrong?

Instalment interest is charged on the difference between what you should have paid by each due date and what you did pay, compounded daily at the prescribed rate for overdue amounts [4][6]. It is not deductible. On top of that, section 163.1 imposes an additional penalty when instalment interest for the year exceeds the amount stated in that provision [5].

One mechanism is worth knowing because it rewards fast reaction: instalments paid early or in excess earn contra-interest that offsets interest charged on deficient instalments in the same year [4]. If you realize in August that you have been underpaying since January, catching up immediately does more than stop the bleeding - the overpayment can work backwards against the earlier shortfalls. Waiting until year end forfeits that.

Where a shortfall was genuinely beyond your control, CRA has discretion to cancel or waive interest and penalties under the taxpayer relief provisions [8]. Discretion is not a plan. It is what you use after the plan fails.

How do I stop instalments from surprising me?

Four habits, none of which require an accountant on retainer.

File the T2 early. The preceding-year figure is the input to options 2 and 3. Filing eleven months after year end means the first several instalments of the new year are guesswork.
Put the instalment due dates in the calendar for the whole year the day you know the amount, with the payment scheduled, not reminded.
Hold the money somewhere it is not spendable. Tax instalments and GST/HST remittances (see GST/HST filing tips) are the two outflows that are not yours to deploy; keeping them out of the operating account is why separating business and personal accounts pays off beyond bookkeeping tidiness.
Keep the books current enough to estimate. Option 1 is only usable if you can see this year's profit with confidence, which means consistently categorized expenses and reconciled months, not a year-end scramble. MapleExpense keeps expenses captured and categorized as they occur, so the corporation has a defensible running picture of profit rather than an annual reconstruction. Whether the numbers are complete enough to rely on is a month-end close question.

Instalments are not a penalty for success, though they land like one. They are simply the tax system asking a profitable corporation to pay as it earns, the same way source deductions ask an employee to. The corporations that find them painless are the ones that started setting the money aside the month they first turned a profit - not the month CRA finally charged interest for not having done so.

Frequently asked questions

Does every Canadian corporation have to pay tax instalments?

No. A corporation pays income tax by instalments only if its tax payable for the current year or the preceding year exceeds a threshold set in the Income Tax Act; below that amount, the corporation simply pays its balance after year end. CRA publishes the current threshold and the exemption conditions on its corporation instalments page. The obligation is created by the Act itself, not by a notice from CRA, so a corporation can owe instalments and instalment interest without ever having received a reminder.

What are the three options for calculating corporate tax instalments?

Under section 157 of the Income Tax Act a corporation may base instalments on (1) its estimated tax payable for the current year, (2) its tax payable for the immediately preceding year, or (3) a hybrid: the first instalment or instalments based on the tax payable for the year before last, with the remainder based on the preceding year. Option one is smallest when profits are falling and risks interest if the estimate proves low. Options two and three use known, already-assessed figures, so they carry no interest risk if the calculation is applied correctly and payments are on time.

Does a corporation pay instalments in its first year?

Generally no. Instalments are measured against tax payable for the current and preceding years, and a corporation in its first taxation year has no preceding-year tax and typically falls below the threshold for the current year. The practical consequence is a trap: the first year is paid as a single balance after year end, and instalments usually begin in the second year, so a profitable start-up gets one full year of cash flow with no monthly tax outflow and then faces both a year-one balance and year-two instalments in the same stretch of months.

Are corporate instalments monthly or quarterly?

Monthly is the default under section 157 of the Income Tax Act. A Canadian-controlled private corporation may be eligible to pay quarterly instead if it meets conditions set out in subsections 157(1.1) to (1.4), which include claiming the small business deduction, having taxable income under a stated limit, and having a clean compliance history over the current and preceding year. Eligibility is tested each year and is lost if the corporation falls out of compliance, in which case it reverts to monthly instalments.

What happens if you underpay a corporate tax instalment?

CRA charges instalment interest, compounded daily at the prescribed rate for overdue amounts, running from the day the instalment was due until the day the tax is paid. Instalment interest is not deductible. Where instalment interest for a year exceeds a threshold set in section 163.1 of the Income Tax Act, an additional instalment penalty applies on top. Interest earned by paying an instalment early can offset interest charged on a later deficient one within the same year, which is why an early catch-up payment is worth making as soon as the shortfall is noticed.

Why do corporate instalments surprise so many small businesses?

Because the obligation is retrospective and silent. It is triggered by the prior year's tax, which is not known until the return is filed, often months into the year in which instalments are already accruing. No invoice arrives, the amounts are not withheld by anyone, and the first concrete signal is an interest charge on the next assessment. A corporation that was profitable in year one therefore discovers in year two that it owes both a year-one balance and a stream of monthly payments, from the same bank account, in the same quarter.

Are GST/HST instalments the same as corporate tax instalments?

No. They are separate obligations under separate statutes with separate due dates. Corporate income tax instalments arise under the Income Tax Act and are based on tax payable. GST/HST instalments arise under the Excise Tax Act and apply to annual filers whose net tax exceeds a threshold, based on the prior year's net tax. A business can be required to make both, and each is tracked in its own CRA program account. Confusing the two, or paying one into the other's account, is a common and correctable filing error.

Sources cited in this article

Income Tax Act, s. 157
Payment of corporate tax by instalments: the monthly default, the three calculation options, and the quarterly instalment rules for eligible CCPCs in subsections 157(1.1) to (1.4).
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-157.html
CRA - Paying your corporation income tax by instalments
CRA landing page for who must pay instalments, the current exemption threshold, due dates, and payment methods.
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporation-instalments.html
CRA Guide T7B-CORP - Corporation Instalment Guide
Worked calculation of each instalment option, instalment base definitions, and how instalment interest and the instalment penalty are computed.
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t7bcorp.html
Income Tax Act, s. 161
Interest on unpaid and deficient instalments, including the contra-interest rule that offsets early payments against later shortfalls.
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-161.html
Income Tax Act, s. 163.1
Additional penalty where instalment interest for the year exceeds the amount stated in the provision.
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-163.1.html
CRA - Prescribed interest rates
Quarterly prescribed rates used to compute interest on overdue taxes and deficient instalments.
https://www.canada.ca/en/revenue-agency/services/tax/prescribed-interest-rates.html
Income Tax Act, s. 125
Small business deduction, one of the conditions referenced in the quarterly instalment eligibility test.
https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-125.html
CRA - Taxpayer relief provisions
Discretionary cancellation or waiver of penalties and interest, including in circumstances beyond the taxpayer's control.
https://www.canada.ca/en/revenue-agency/services/tax/taxpayer-relief-provisions.html

All sources verified 2026-09-23. Spotted a link that has moved? Email [email protected] and we will correct it.