Personal Income Taxes

By Geoff Sgarbossa, CD, CFP, RIS, Financial Planner 

Income taxes in Canada started as a temporary measure to help pay for the First World War. It seems the term “temporary” was used quite loosely, and we now find ourselves navigating a rather complex system. As is common in many developed countries, Canada uses a self-assessment system, which means the responsibility to report the income and calculate the tax sits with the taxpayer, not the government.

That sets up a perpetual back-and-forth. Taxpayers want to keep more of what they earn, and governments need ever-increasing amounts to fund the programs and services we rely on. Both sides are legitimate in that we should all contribute to the society we benefit from, but we should also reduce our tax liability as far as the law allows. This paper covers the obligation. The next discussions in the series will discuss how to plan for and reduce your tax liability within both the spirit and the letter of the law.

Planning, Avoiding, and Evading

All three reduce or defer tax. Only one is a strategy we would put our name to, however!

• Tax planning is legal, it respects both the letter and the spirit of the Income Tax Act, and it belongs in every financial plan. A dollar saved in tax is worth more than a dollar earned, because the saved dollar is ready to spend while the earned one still has to be taxed. The catch is timing. It must happen during the year, not at the filing deadline.

• Tax avoidance follows the letter of the law and is technically legal, but it falls offside with the spirit of the law by leaning on loopholes the Act never intended. Parliament and the CRA attempt to close those gaps as they find them, with tools like the Alternative Minimum Tax and the General Anti-Avoidance Rule, which lets them challenge a transaction whose only real purpose was avoiding tax, even where every individual step followed the letter of the Act.

• Tax evasion is knowingly reporting less tax than the law requires. Cash under the table, unreported tips, income left off the return because no slip arrived. It is illegal, it carries criminal exposure, and it is not worth it. Do not do it.

Who Has to File

There are really three questions here, and folks tend to answer only the first one.

Who must file. A return is required if you owe tax beyond what was already withheld, or in situations such as owing CPP contributions and EI premiums or having sold capital property. It is also required if the CRA has issued a demand to file. If a demand shows up, deal with it. That is the CRA telling you it already knows something is outstanding.

Who should file. Not required, but better off doing it. It is how the CRA records what you are entitled to carry forward, RRSP room, unused tuition credits, and losses. It is also how income-tested programs and benefits are calculated, from disability and education savings grants to the Canada Child Benefit.

Who does not have to file. Broadly, if there was no tax payable for the year and you did not dispose of capital property or receive a demand, you are generally not required to file. Refer to “Who should file” above.

Filing and Payment Deadlines

Filing deadlines and payment deadlines are two separate considerations, and they do not always land on the same date.

Situation	Filing due date	Balance owing due
Individual	Apr 2030	Apr 2030
Self-employed and spouse	Jun 2015	Apr 2030
Partner in a partnership	Jun 2015	Apr 2030

Final returns, corporations, and trusts have their own deadlines. It is your responsibility to know when you are obligated to file and when you are obligated to pay.

Penalties and Interest

Always file on time, even if you cannot immediately pay. Penalties and interest are two separate costs, and the difference between them is where folks get hurt.

Penalties are triggered when you do not follow the rules. Filing after the deadline is one. Leaving income off the return is another, whether that is a slip that arrived late or a bit of side income you did not think was reportable. Intent is not required. The omission, total or partial, is what gets penalized, and every subsequent infraction draws steeper penalties. Where the omission was deliberate, this is also where potential charges for tax evasion live. So always file on time and do not leave anything out.

Interest does not care why you owe. It starts when the balance was due and keeps accruing as long as any of it is outstanding. It applies to penalties as well as to unpaid tax, so filing late without the funds to pay compounds the problem.

How the Tax Actually Gets Paid

Governments need cash flow through the year to pay the bills, so the tax does not wait for April. There are only two ways it reaches the CRA. Either someone withholds it for you, or you send it yourself. That is the whole list.

Source deductions are the first way, and most folks never give them a thought. Withholding is not a choice. The Income Tax Act requires the payer to deduct tax from the payment, calculate the amount using the CRA's legislated formulas, and remit it to the Receiver General on your behalf. The obligation sits with the payer, and it carries its own penalties and interest. Employers withhold from every cheque, along with CPP and EI, and pension and annuity payers do the same. The tax is paid before the money ever reaches you, so the return in April only settles the difference between what was withheld and what was actually owed, which is why a refund is not a gift. It is your own overpayment coming back.

Instalments are the second way, and they are an obligation as well, not an alternative you elect into. They cover the income no formula catches at source. Self-employment and rental income, investment income, capital gains, and the payments the law does not require withholding on, such as a RRIF minimum amount. Nothing was forgiven because nothing was deducted. The obligation simply moved onto your desk.

Instalments are expected once your net tax owing tops $3,000, or $1,800 in Quebec, in the current year and in either of the two previous years. Both parts must be met, so one unusual year does not trigger the requirement. The payments are due March 15, June 15, September 15, and December 15. The same penalties and interest apply as they do everywhere else. Only the payment deadlines change. The filing deadline stays where it was.

Here is the part that matters. Nobody pays their tax in April. Employees simply do not notice, because it leaves every cheque before they see it. What catches folks is a change in how they get paid. Retire, go out on your own, or sell a property, and money that used to leave automatically now has to be sent deliberately. One route or the other, the tax is paid through the year, and neither one is optional.

The Float Argument

A suggestion I hear a lot is to skip the instalments, invest that money through the year, and settle up with the CRA in April with an alleged extra few dollars earned along the way. Taken at face value, I see the appeal. Why would everyone not do this!? Well, the short answer is risk.

Let us run the numbers. You skip your instalments and invest that money instead. The CRA adds their interest, and potential penalties, for missing the quarterly payment deadlines. Because this money is liquidated to pay the tax bill within a year, we need to stay conservative. FP Canada's assumption guidelines put short-term money at 2.4% before fees. The CRA's interest rate on overdue tax as of this writing is 7%. I think you see where I am going with this! The strategy is down 4.6% before fees, before any penalty, and before a cent of the actual tax has been paid.

For any leveraged strategy to win, the investment must earn more than the strategy costs, plus enough extra to compensate for the added risk. This is where things go off the rails. FP Canada's long-term equity assumptions run from 6.3% to 7.5%, depending on the market, and Canadian and U.S. equities sit below the CRA's 7%. Even emerging markets, the most volatile of the group, clear it by half a point, which is no risk premium at all. The juice is not worth the squeeze here! This planner recommends you pay your tax bill on time and find other ways to earn a dollar.

Conclusion

Self-assessment means most of the responsibility, and most of the opportunity, sits with you. Filing on time and paying on time are the cheapest things you will do all year. Everything past that is planning, and planning happens during the year, not at the deadline.

Speak to one of our Wealth Advisors at Keill & Associates to review your filing and payment obligations and build a tax plan that works through the year.

Disclaimer and Notice to Reader: This Serious Money Paper is provided for general information purposes only and does not constitute tax, legal, financial, or investment advice. Rules and rates change, and individual circumstances differ. Please consult a qualified professional before acting on this information.

Posted September 2026