As interest rates rise in Canada, taxpayers may face higher charges on their notice of assessments. Failing to make required instalment payments throughout the year could catch some people off‑guard, especially in light of higher interest rates. Here, we outline the calculations behind instalment interest and penalties, along with the costly consequences of not meeting payment requirements.
Application of instalment interest and penalties
Let’s begin with the conditions where instalment interest and penalties are payable. The Canada Revenue Agency (“CRA”) charges instalment interest when all of the following apply:
 The taxpayer is required to pay instalments in the taxation year;
 The taxpayer received an instalment reminder showing the amount payable; and
 The instalment payments were either not made or not made in full, or were paid late
Calculation of instalment interest and penalties
Instalment interest
Instalment interest is charged on all late or insufficient instalment payments. It is compounded daily at the prescribed interest rate and calculated as follows:
A – B = C, where:
A = Interest on each required instalment not paid
 This is calculated from the day the payment was due until the taxpayer’s balance due date, using the instalment payment calculation option resulting in the least amount of interest.
B = Interest on each instalment the taxpayer paid
 This is calculated starting from the later of the date the instalment payment was made or Jan. 1, up to the taxpayer’s balance due date.
C = The taxpayer’s interest charge
 The taxpayer’s instalment interest owing is the difference between A and B.
Instalment penalties
The CRA charges instalment penalties when instalment interest for the taxation year exceeds $1,000. Instalment penalties are calculated first by determining which of the following amounts are higher:
 A flat rate of $1,000
 25 per cent of instalment interest the taxpayer would pay if they did not make instalment payments for the taxation year
Next, the higher of these amounts is subtracted from the taxpayer’s actual instalment interest charges for the taxation year, then divided by two to determine the taxpayer’s instalment penalties.
10‑year history of interest rates
The prescribed interest rates used to calculate instalment interest over the past 10 years are as follows:
Period  Rate  Period  Rate  
2021 Q4  5%  
2023 Q3  9%  2021 Q3  5%  
2023 Q2  9%  2021 Q2  5%  
2023 Q1  8%  2021 Q1  5%  
2022 Q4  7%  2020 Q4  5%  
2022 Q3  6%  2020 Q3  5%  
2022 Q2  5%  2020 Q2  6%  
2023 Q1  5%  2020 Q1  6% 
Period  Rate  Period  Rate  
2019 Q4  6%  2017 Q4  5%  
2019 Q3  6%  2017 Q3  5%  
2019 Q2  6%  2017 Q2  5%  
2019 Q1  6%  2017 Q1  5%  
2018 Q4  6%  2016 Q4  5%  
2018 Q3  6%  2016 Q3  5%  
2018 Q2  6%  2016 Q2  5%  
2018 Q1  5%  2016 Q1  5% 
Period  Rate  Period  Rate  
2015 Q4  5%  2014 Q4  5%  
2015 Q3  5%  2014 Q3  5%  
2015 Q2  5%  2014 Q2  5%  
2015 Q1  5%  2014 Q1  5% 
Example
Let’s assume a taxpayer has a $5,000 quarterly instalment requirement starting in January 2023. The following example calculates the amount of interest and penalties owed by this taxpayer as of April 30, 2024, assuming no instalment payments are made.
Instalment interest
The interest on unpaid instalments is calculated in the following table:
Date  Instalment payment due  Payment received  Balance  Number of days outstanding  Interest (9%) 
March 15, 2023  $5,000  $ –  $5,000  92  $114.71 
June 15, 2023  $5,000  $ –  $10,114.71  92  $232.04 
Sept. 15, 2023  $5,000  $ –  $15,346.75  91  $348.20 
Dec. 15, 2023  $5,000  $ –  $20,694.96  136  $705.67 
Total  $1,400.63 
Notes:
 The number of days outstanding is calculated as the number of days each total balance is outstanding, with the final balance outstanding until the taxpayer’s balance due date – April 30, 2024.
 Interest is compounded daily at nine per cent divided by 365, equaling 0.0246575 per cent.
Instalment interest would be as follows:
A = $1,400.63 (from table above)
B = $0 (taxpayer made no instalment payments)
C = $1,400.63 ($1,400.63 minus $0)
The instalment interest owed by the taxpayer is $1,400.63.
Instalment penalties
First, it must be determined which amount is higher:
 $1,000
 $400.63 ($1,400.63 x 25 per cent)
Instalment penalties are then calculated as follows:
Instalment interest due  $1,400.63 
Higher of A or B  $1,000.00 
Difference  $400.63 
At 50%  50% 
Instalment penalties  $200.31 
Here, the taxpayer owes $1,400.63 in instalment interest and $200.31 in instalment penalties on the overdue payments.
Now, to demonstrate the full impact of an interest rate increase, the above example will be recalculated using a five per cent interest rate.
Instalment interest
Date  Intalment payment due  Payment received  Balance  Number of days outstanding  Interest (5%) 
March 15, 2023  $5,000  $ –  $5,000.00  92  $63.41 
June 15, 2023  $5,000  $ –  $10,063.41  92  $127.62 
Sept. 15, 2023  $5,000  $ –  $15,191.03  91  $190.54 
Dec. 15, 2023  $5,000  $ –  $20,381.57  136  $383.24 
Total  $764.81 
Interest is compounded daily, calculated at a rate of five per cent divided by 365, equaling 0.0136986 per cent, per day. At an interest rate of five per cent, the instalment interest owed by the taxpayer would be $764.81.
A = $764.81
B = $0
C = $764.81
Instalment penalties
Since the taxpayer’s instalment interest has not accumulated beyond $1,000, no instalment penalties are charged. At a five per cent interest rate, the taxpayer owes $764.81 in instalment interest and $0 in instalment penalties. The difference between the instalment interest and penalties charged at interest rates of 9 per cent and 5 per cent is summarized as follows:
Interest at 9% 
$1,400.63 
Interest at 5% 
$764.81 
Difference 
$635.81 


Penalties at 9% interest rate 
$200.31 
Penalties at 5% interest rate 
– 
Difference 
$200.31 


Total difference 
$836.13 
If you have any specific questions or concerns regarding the impact of inflation and rising rates on your tax instalment payment obligations, simply contact your Baker Tilly advisor.
References:
Canada Revenue Agency. Required tax instalments for individuals Interest and penalty charges. Government of Canada, 24 Jan. 2023.
Canada Revenue Agency. When the CRA charges interest and penalties. Government of Canada, 13 Mar. 2023.