I am a U.S. citizen now living in Canada. My accountant says that I might have to pay U.S. and Canadian quarterly tax payments. How are these calculated and when are they due?
Most of our firm’s clients have financial, investment and tax considerations in Canada and the United States, so the filing of tax returns in both countries is necessary. U.S. citizens in Canada have either already met the mid-April deadline for filing their U.S. personal tax returns for the 2023 tax year or have filed for an extension until Oct. 15.
Canadian tax residents had until April 30 to file their 2023 Canadian tax returns. Unlike the United States, there is no opportunity to file an extension in Canada.
So, although the timing and the tax-filing dates are different in each country, what is not different is that taxes are due at the time of the filing dates. And for those who might have to pay a bit more in tax in either country beyond what you might have had withheld at source, you might need to make additional payments over the course of the year.
In the United States, the Internal Revenue Service (IRS) requires certain individuals and entities to pay estimated taxes throughout the year. Here are the key requirements.
Who needs to pay estimated taxes?
Under U.S. rules, if you expect to owe more than $1,000 of additional personal tax for the 2024 tax year – beyond any tax withheld at source – you will be required to make estimated tax payments. If that is the case, your first quarterly payment would have been due on April 15. In most cases, your tax professional might have prepared 2024 estimated tax calculations and quarterly payment vouchers when your 2023 tax return was completed. We work with our clients on a quarterly basis over the course of the year to make sure payments are properly calculated to avoid underpayment penalties.
When to pay
Estimated tax payments are typically due quarterly. The due dates are generally April 15, June 15, Sept. 15 and Jan. 15 of the next year (or the next business day if the due date falls on a weekend or holiday).
How to calculate estimated tax
Estimated tax payments are based on the taxpayer’s expected income, deductions, credits, and tax for the year. Taxpayers can use the Estimated Tax for Individuals form (1040-ES), to calculate their estimated liability. The form provides worksheets to help taxpayers estimate their income, deductions, and credits for the year. A tax preparer can also use software to calculate these recommended amounts for you.
How to pay
If you are a U.S. citizen or green-card holder who has moved to Canada from the U.S. during a year of transition, we generally recommend that you continue to make your U.S. quarterly payments as calculated from your previous year’s filed return. You still have an obligation to file a U.S. tax return on your worldwide income – including any income now earned or realized in Canada.
If there are material changes to your income now that you are in Canada, and with the ability to utilize Canadian tax paid as a foreign tax credit on your U.S. return, you might want to work with your cross-border tax professional to recalculate your remaining current-year U.S. estimated taxes.
Taxpayers can make estimated tax payments using several methods, including the Electronic Federal Tax Payment System, which allows you to make electronic payments online or by phone, direct payment through the IRS website, payments using a credit or debit card through approved payment processors or by mailing a cheque or money order along with Form 1040-ES to the IRS.
Penalties for underpayment
Failure to pay enough estimated tax by the due dates may result in penalties and interest. The IRS imposes penalties based on the amount of underpayment and the length of time it remains unpaid.
What about Canada?
In Canada, the Canada Revenue Agency (CRA) administers the instalment payment program for individuals who have to pay tax by installments. The instalment requirements depend on your total tax owing and the frequency of instalment payments you’re required to make.
Determining if you need to pay instalment
You’re required to pay tax by installments for the current tax year if your net tax owing for the current tax year and either of the two preceding tax years is more than $3,000.
Calculation of instalment payments
The CRA typically provides instalment payment amounts based on your previous year’s tax return. They calculate your instalment payments based on the information from your previous year’s return. If your tax situation changes significantly during the year, you may need to recalculate your instalment payments to avoid over- or underpaying.
Frequency of payments
Instalment payments are generally due quarterly. The due dates for instalment payments are March 15, June 15, Sept. 15 and Dec. 15 of each tax year. However, if you have business income, you may have different due dates.
Terry F. Ritchie is a partner with Cardinal Point Wealth Management and a member of the Financial Planning Association of Canada.