The Fine Print Canada · PUBLISHED 16 JUL 2026 · VERIFIED 16 JUL 2026 · CA EDITION

Why That CRA Instalment Letter Costs You $10,000

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A Canadian who ignores CRA instalment reminders on a consistent <mark class=“fig”>$5,000 annual balance can easily rack up over <mark class=“fig”>$10,000 in extra interest and penalties over 20 years, because CRA charges prescribed rate + 4%, compounded daily, once your instalment interest tops <mark class=“fig”>$1,000 a year.

The number that matters

9% — overdue tax interest rate (Q2 2023) — CRA prescribed rate used for late personal tax and missed instalments, compounded daily.

This 9% is before any extra instalment penalty; it represents an after‑tax, risk‑free “return” you are effectively paying to the government when you ignore instalment letters.

How it quietly costs you

Mechanism: how the CRA instalment system works and when you’re on the hook

• You must generally pay income tax by instalments if your net tax owing (tax owing minus amounts withheld at source) is more than <mark class=“fig”>$3,000 in both:

• the current year, and

• either of the 2 previous years. In Quebec, the threshold is <mark class=“fig”>$1,800 each for federal and provincial tax, calculated separately.

• You only have to make instalment payments if the CRA sends you an instalment reminder. If you don’t receive a reminder, you are not required to make instalments, even if you can already see that you’ll owe more than <mark class=“fig”>$3,000.

• Instalment reminders are based on past years’ returns, not your current reality. For example, CRA typically uses your second‑preceding year tax bill for the March and June payments, and your preceding year tax bill for the September and December payments.

What happens when you ignore the letter

• If you are required to pay instalments and:

• make no payments,

• or pay late,

• or pay less than required, the CRA charges instalment interest on all late or insufficient instalment payments.

• Instalment interest:

• is compounded daily,

• is charged at the CRA’s prescribed interest rate, which can change every quarter. For overdue taxes (including missed instalments), the rate was:

• 9% from April 1–June 30, 2023,

• 7% in Q4 2025 for overdue income tax.

• On top of that, CRA charges instalment interest at “prescribed rate + 4%” for failing to make the required instalments. That extra 4% is explicitly described as being “charged to discourage the non‑payment of tax”.

Penalty layer (beyond interest)

• You may also pay a penalty if your instalment payments are late or less than required and your instalment interest for the year exceeds <mark class=“fig”>$1,000.

• CRA’s penalty formula (for individuals) is effectively:

• Calculate instalment interest that would be payable if you made no instalments.

• The penalty equals 50% of the instalment interest that exceeds the greater of:

• <mark class=“fig”>$1,000, or

• 25% of the “no‑instalment” interest amount.

Old vs better: paying late vs following the reminder

• “Old” (ignore the letter):

• You treat CRA like a line of credit and skip instalments.

• If you end up owing more than <mark class=“fig”>$3,000 and should have paid instalments, CRA charges daily‑compounded instalment interest at prescribed rate + 4%, plus a possible penalty once instalment interest passes <mark class=“fig”>$1,000.

• “Better” (follow the reminder):

• If you simply pay the amounts shown on the CRA instalment reminder on time:

• You will not be charged instalment interest, even if your actual tax for the year ends up being more than those instalments.

• If you overpay, CRA pays you credit interest on your instalment overpayments at the lower prescribed overpayment rate.

Concrete impact example (annual pattern)

• Assume:

• You owe <mark class=“fig”>$5,000 each year beyond withholdings.

• You receive instalment reminders but ignore them.

• Prescribed overdue rate averages 7%, so instalment interest rate is roughly 11% (7% + 4%), compounded daily.

• Approximate annual cost of ignoring and paying in a lump sum at filing:

• Instalment interest on <mark class=“fig”>$5,000 at ~11% ≈ <mark class=“fig”>$550 per year (rough simple interest proxy; daily compounding makes it slightly higher).

• If instalment interest exceeds <mark class=“fig”>$1,000 in a given year (e.g., larger balances, multiple years of arrears), a penalty of roughly 50% of the interest above the <mark class=“fig”>$1,000/25% threshold kicks in.

Over a 10‑year period of consistently ignoring instalments on a <mark class=“fig”>$5,000 annual balance, you could burn around <mark class=“fig”>$5,500 or more in pure interest to the CRA, with penalties adding further cost if the annual interest ever crosses <mark class=“fig”>$1,000.

The second, compounding trap

Mechanism: compounding and timing risk when income is volatile

Even when you’re allowed to “ignore” a specific instalment reminder because your current‑year income is lower, there is a second problem: your estimate can be wrong, and you pay a high price for being too optimistic.

• CRA allows a current‑year option (Option 3): you estimate your current‑year tax and base instalments on that. If your instalments end up less than what you owe, and less than either the prior‑year or second‑prior‑year method would have required, CRA charges you instalment interest on the shortfall.

• Interest is calculated quarter by quarter at changing prescribed rates:

• Example from 2022:

• 5% from March 15–June 30,

• 6% from July–September,

• 7% from October–December,

• then whatever the 2023 rate is from January–April 2023. This means that a missed March instalment accrues interest across multiple rate increases until the tax is finally paid.

• Starting May 1 following the tax year, any unpaid tax balance (after instalments) also starts accruing arrears interest at the prescribed overdue rate.

Cost of under‑estimating current‑year tax

• Suppose you cut your instalments in half using the current‑year method because you expect lower income, but your actual tax ends up the same as last year.

• If the “safe” instalment amount was <mark class=“fig”>$5,000, and you only paid <mark class=“fig”>$2,500 through the year:

• Shortfall: <mark class=“fig”>$2,500.

• If average instalment rate is 9% (historic example) plus the 4% uplift, you’re effectively paying **13% annualized interest** on that shortfall, compounded daily, until the balance is paid.

• Because instalment interest is calculated for each day the payment is late, missing early‑year instalments (March, June) is significantly more expensive than missing a December payment.

Long‑run cost made concrete

• Take someone who:

• Owes <mark class=“fig”>$8,000 beyond withholdings in a high‑earning year.

• Pays no instalments, believing they can “just pay in April”.

• Average instalment interest rate: assume 11%, compounded daily.

• Rough annual interest cost:

• <mark class=“fig”>$8,000 × 11% ≈ <mark class=“fig”>$880 for that year, before any arrears interest after April 30 of the following year.

• If their business income fluctuates and they repeat this pattern 10 times over a 25‑year career (not every year, just in 10 different years):

• <mark class=“fig”>$880 × 10 ≈ <mark class=“fig”>$8,800 in interest alone.

• If in some of those years the instalment interest exceeds <mark class=“fig”>$1,000, CRA may add penalties equal to about 50% of the interest above the <mark class=“fig”>$1,000/25% threshold, potentially pushing the total cost well into five figures.

What this looks like in practice

Persona

• Name: Amrita
• Age: 42
• Job: Self‑employed consultant (incorporated but paid mostly through dividends)
• Income: <mark class=“fig”>$150,000 gross in a typical year.
• Personal tax position: after withholdings and instalments, often has <mark class=“fig”>$5,000–<mark class=“fig”>$8,000 net tax owing.
• Account type: T1 personal return, with occasional corporate T2 instalment obligations.
• Years to retirement: 23 years (aiming for age 65).

For simplicity, focus on her personal instalments (T1) in this explainer.

Discovery 1 — She is required to pay instalments

• By checking past Notices of Assessment, she sees her net tax owing (after withholdings) was:

• <mark class=“fig”>$4,200 in 2024,

• <mark class=“fig”>$4,600 in 2023,

• <mark class=“fig”>$3,900 in 2022 (illustrative pattern consistent with CRA thresholds).

• Because her net tax owing was more than <mark class=“fig”>$3,000 in each of the last two years, and will be over <mark class=“fig”>$3,000 again this year, she must pay tax by instalments when CRA sends reminders.

• Comparison:

• What she believed: “Instalments are optional; they’re just pre‑payments if I feel like it.”

• Reality: CRA’s <mark class=“fig”>$3,000 test makes instalments mandatory, and ignoring the letters triggers prescribed‑rate +4% interest on shortfalls.

Discovery 2 — Interest rate vs her investments

• She had been intentionally ignoring instalments, thinking her investment account earning ~6% annually was a better use of cash.

• But CRA’s overdue tax rate hit 9% in Q2 2023 and is 7% in Q4 2025, meaning her effective instalment interest rate is roughly 13% and 11% respectively (prescribed rate + 4%).

• Comparison:

• What she believed: “I can earn more in the market.”

• Reality: She’s effectively paying CRA an after‑tax, double‑digit “interest rate” that is significantly higher than the 6% she reasonably expects from her portfolio.

Discovery 3 — Dollar cost over her working life

• Looking back through CRA’s “Instalment interest and penalty” line items, she totals roughly <mark class=“fig”>$600 per year in instalment interest over the past 5 years — about <mark class=“fig”>$3,000 paid just in interest.

• If she continued this pattern for the remaining 23 years of her career:

• <mark class=“fig”>$600 × 23 ≈ <mark class=“fig”>$13,800 in additional interest.

• If she has a few bigger‑income years where instalment interest crosses <mark class=“fig”>$1,000, the penalty formula could easily tack on an extra <mark class=“fig”>$200–<mark class=“fig”>$500 in those years. It is very plausible that she’d waste <mark class=“fig”>$15,000+ over her working life purely by ignoring instalment letters.

• Comparison:

• Versus doing it right: Following CRA’s reminders would have reduced this to nearly <mark class=“fig”>$0 in instalment interest, and might even have earned her modest credit interest on overpayments in some years.

The full cost of doing nothing

Using Amrita’s case as a model:

• Assume:

• Average net tax owing needing instalments: <mark class=“fig”>$6,000/year.

• She ignores instalment reminders and pays only at filing.

• Effective instalment interest rate: 11%, compounded daily (approximate effective cost combining prescribed rate + 4%).

• Interest charges average <mark class=“fig”>$660/year on missed instalments.

• She has 3 “spike” years in the next 23 where:

• Net tax owing without instalments is <mark class=“fig”>$10,000, and

• Instalment interest exceeds <mark class=“fig”>$1,000, triggering a penalty of roughly <mark class=“fig”>$250 each time (50% of interest above the <mark class=“fig”>$1,000/25% threshold; simplified but directionally consistent).

• Modelled lifetime cost (remaining career, 23 years):

• Base annual instalment interest:

• <mark class=“fig”>$660 × 23 = <mark class=“fig”>$15,180.

• Extra penalties in 3 spike years:

• <mark class=“fig”>$250 × 3 = <mark class=“fig”>$750.

• Total projected lifetime cost ≈ <mark class=“fig”>$15,930, purely from ignoring instalment reminders.

This <mark class=“fig”>$15k–<mark class=“fig”>$16k is money she could otherwise contribute to her RRSP/TFSA, pay down high‑interest debt, or keep invested for retirement.

What to do about it

1. Check if you’re actually required to pay instalments

1. Action: Confirm whether you meet the CRA instalment requirement.
2. Tool/portal:

• CRA My Account → “Tax returns” → “Notices of Assessment” and “Account balance and statement.”

3. Steps:
4. Log in to CRA My Account and open your last three Notices of Assessment.
5. For each year, find “Net tax owing” (total tax minus amounts withheld at source).
6. If net tax owing is more than <mark class=“fig”>$3,000 for both the current year estimate and either of the two previous years (or <mark class=“fig”>$1,800 in Quebec for federal/provincial separately), and you have an instalment reminder, you are required to pay instalments.
7. What “good” looks like:

• You either:
• Do not meet the <mark class=“fig”>$3,000 threshold (so no instalment requirement), or
• You do meet it and have a plan to pay the instalment amounts by the CRA due dates.

2. Find your current CRA instalment schedule and compare to your own estimate

1. Action: Review CRA’s instalment reminders and decide whether to follow them or use the current‑year method.
2. Tool/portal:

• CRA My Account → “Mail” or “Instalment reminders.”

3. Steps:
4. In CRA My Account, open your latest instalment reminder (usually issued in February and August).
5. Note the March 15, June 15, September 15, and December 15 suggested payment amounts and total for the year.
6. Compare CRA’s total suggested instalments to your own estimate of this year’s net tax owing:

• If your income is stable or higher, following CRA’s amounts is usually safest and guarantees no instalment interest.
• If your income is significantly lower, you may opt for the current‑year method but should keep a buffer in case your estimate is wrong.

4. What “good” looks like:

• Your planned instalments are at least as much as the higher of:
• Last year’s net tax owing, or
• This year’s realistic projected net tax owing. This minimizes the chance of any instalment interest charges.

3. Run the interest math and decide if “ignoring” makes sense

1. Action: Compare CRA’s effective instalment interest rate vs the after‑tax return on your savings/investments.
2. Tool/portal:

• CRA prescribed interest rate page (search: “CRA interest rates for the fourth calendar quarter”).

3. Steps:
4. Look up the current interest rate charged on overdue taxes for individuals on CRA’s prescribed interest rate page.
5. Add 4 percentage points to that rate to approximate the effective instalment interest rate if you ignore required instalments.
6. Compare that combined rate to:

• Your after‑tax expected rate of return on investments, or
• The interest rate on any debts you have (e.g., mortgage, line of credit, credit card).

3. What “good” looks like:

• If CRA’s effective rate (prescribed + 4%) is higher than your investment return or debt rate (which is usually the case), the rational move is to pay instalments on time and avoid giving CRA a double‑digit return on your money.

A myth worth clearing up

Myth: “If CRA sends me an instalment reminder, it’s just a suggestion — I can safely ignore it and just pay my tax when I file.”

Fact: According to the CRA and multiple tax bulletins, if your net tax owing exceeds <mark class=“fig”>$3,000 for the current year and either of the previous two years and you receive a reminder, you are required to pay tax by instalments; ignoring those instalment reminders leads to daily‑compounded instalment interest at the prescribed rate plus 4%, and potentially steep penalties once annual instalment interest exceeds <mark class=“fig”>$1,000.

Sources

• https://www.canada.ca/en/revenue-agency/services/payments/payments-cra/individual-payments/income-tax-instalments/interest-penalty-charges.html
• https://www.canada.ca/en/revenue-agency/services/payments/payments-cra/interest-penalties-late-incorrect-payments.html
• https://www.canada.ca/en/revenue-agency/services/tax/prescribed-interest-rates/2025-q4.html

Researched 2026-07-16.

Corrections & disclosure: an AI-assisted, human-reviewed guide. Every figure is dated and sourced above. Spot something out of date or wrong? Tell us and we’ll correct it — corrections are noted here and in the video description.