Quarterly Tax Instalments, Demystified
At some point in your second or third year of freelancing, an envelope arrives from the CRA suggesting you pay thousands of dollars by March 15 — for a tax year that hasn't even ended. That letter (the INNS3 instalment reminder) causes more panic than almost any other CRA correspondence, and most of the panic comes from a misunderstanding: instalments are not an extra tax. They are the self-employed version of the withholding that used to come off your paycheque automatically — pay-as-you-go for people with no employer to do the withholding. This guide covers who actually has to pay, the three ways to calculate the amounts (one of which guarantees zero interest), what happens when you skip a payment, and the mechanics of actually sending the money.
Who Has to Pay Instalments: the $3,000 Trigger
You are required to pay income tax by quarterly instalments when your net tax owing is more than $3,000 — approximately $1,800 for Quebec filers, since Revenu Québec collects the provincial share separately — in the current year AND in either of the two preceding years. Both parts of the test matter: one big year surrounded by small ones doesn't lock you in.
"Net tax owing" is simpler than it sounds: it's your total federal and provincial income tax for the year, minus anything that was withheld at source. An employee earning $80,000 has thousands withheld from their paycheques, so their net tax owing at filing time is usually near zero — no instalments. A freelancer earning the same $80,000 has nothing withheld, so nearly their entire tax bill counts as net tax owing. That's why most established full-time freelancers cross the threshold, and most employees never do. (For the full picture of what self-employed Canadians owe — income tax, CPP, GST/HST — see our self-employed taxes guide.)
One important nuance: the CRA's reminders are based on your past returns. If you know your current year's net tax owing will come in under $3,000 — you scaled back, took a staff job, had a loss year — you can lawfully pay less than the reminders suggest, or nothing. But you bear the risk: if your estimate is wrong, instalment interest applies retroactively.
The Four Due Dates
| Instalment | Due Date |
|---|---|
| Q1 | March 15 |
| Q2 | June 15 |
| Q3 | September 15 |
| Q4 | December 15 |
When the 15th falls on a weekend or public holiday, the payment is considered on time if the CRA receives it the next business day. Note the rhythm mismatch with the tax calendar: you make the Q1 payment for the current year a full month before the April 30 payment deadline for the previous year — the spring cash-flow squeeze that catches many freelancers is those two obligations landing six weeks apart.
The INNS3 Reminder Letters
The CRA mails (or posts to My Account) instalment reminders twice a year: a February letter covering the March and June payments, and an August letter covering September and December. The suggested amounts follow a formula: the February amounts are based on your tax from two years ago (the most recent return the CRA has processed at that point), and the August amounts are adjusted so the four payments together equal your last year's total tax.
That's why the September and December amounts often jump after a strong year — the back half of the schedule is doing catch-up. The reminder is a suggestion with a guarantee attached, not an invoice: what you actually owe for the year is settled when you file.
The Three Ways to Calculate Your Instalments
1. The No-Calculation Method — Zero Interest Risk
Pay exactly what the reminders say, by the due dates. The CRA guarantees no instalment interest, even if the reminder amounts turn out to be too low for your actual year. This is the right default for anyone whose income is stable or rising and who values certainty over optimizing cash flow.
2. The Prior-Year Method — the Safe Harbour
Pay one quarter of last year's total tax at each due date. Even if your income doubles this year, paying the prior-year amount on time means no instalment interest — the extra tax is simply due April 30. This method beats the reminders when your income two years ago was unusually high (the February reminders overshoot) and your last year was more representative.
3. The Current-Year Method — Cheapest When Income Drops
Estimate this year's tax and pay one quarter of the estimate each due date. If your income has genuinely fallen, this frees up cash the other two methods would send to Ottawa a year early. The trade-off: you bear the estimate risk. Underestimate, and interest is charged as if you'd owed the correct instalments all along.
Worked Comparison
A freelancer's total tax: $6,000 two years ago, $8,000 last year, and a realistic estimate of $5,000 this year (a deliberately lighter year).
| Method | Payments | Total Prepaid | Interest Risk |
|---|---|---|---|
| No-calculation | $1,500 × 2 (Mar/Jun, from the $6,000 year), then $2,500 × 2 (Sep/Dec, topping up to $8,000) | $8,000 | None — guaranteed |
| Prior-year | $2,000 × 4 | $8,000 | None if paid on time |
| Current-year | $1,250 × 4 | $5,000 | On you — interest if the $5,000 estimate is low |
In this scenario the current-year method keeps $3,000 in the freelancer's account until filing — worthwhile only if the estimate is solid. That's an information problem: you can only use the current-year method confidently if you actually know your year-to-date income and deductions.
Instalment Interest (and the Penalty on Top)
Miss or underpay an instalment and the CRA charges instalment interest, compounded daily at the prescribed rate — roughly 8–10% in recent years (verify the current quarter's rate on canada.ca). Three things soften or sharpen it:
- It applies even if you pay in full by April 30. The balance-due deadline and the instalment schedule are separate obligations; settling the year doesn't erase interest already accrued on late quarters.
- The offset rule works in your favour. Paying a quarter early, or overpaying one quarter, generates credit interest that offsets debit interest on another. A December catch-up payment can meaningfully shrink the damage from a missed September.
- Interest over $1,000 can trigger a penalty. When your instalment interest for the year exceeds $1,000, the CRA can add an instalment penalty on top of the interest itself. This is rare for typical freelancer amounts but real for high earners who ignore the schedule entirely.
How to Actually Pay
- Online banking — add a payee named roughly "CRA (revenue) – tax instalment" (naming varies by bank) with your SIN as the account number. The most common method.
- CRA My Payment — pay directly on the CRA site by Visa Debit or Interac.
- Pre-authorized debit — set up the four payments in CRA My Account once and forget the due dates.
- At your bank branch — with the remittance voucher from the INNS3 letter.
Keep the confirmation numbers. Payments appear in CRA My Account within a few business days, and everything you've instalment-paid is credited against your tax when you file — if you over-installed, the excess comes back as a refund.
Instalments Are a Prepayment, Not a Second Tax
The mental model that removes the fear: your tax for the year is whatever your T1 says next April. Instalments only change when you hand it over. Freelancers who run the 25–30% reserve system — moving a fixed slice of every client payment into a dedicated tax account on arrival — find instalments almost boring: each due date is a transfer from the reserve to the CRA, and April is a small true-up instead of a crisis.
The dangerous year is year two. First-year freelancers usually owe no instalments (no prior-year tax to trigger them), file their first return in April, and then get hit with a big balance and the start of quarterly reminders in the same twelve months. Our first-year tax checklist walks through setting up the reserve before that collision arrives.
One adjacent fact so it doesn't surprise you: GST/HST has its own separate instalment system for annual filers whose net GST/HST tax is $3,000 or more — different account, different money. See our quarterly GST/HST remittance guide.
Knowing Your Number
Every method above gets easier with a live view of your year. The no-calculation method still benefits from knowing whether the reminders overshoot; the current-year method is only usable if your estimate is grounded in real numbers. InvoiceFast gives you both sides: your invoices show year-to-date income, and the Tax tab tracks expenses, mileage, and home-office costs against real T2125 lines, with a running summary you (or your accountant) can base an estimate on. It reports — it doesn't file. Your first 25 expenses and 25 trips are free; Pro + Tax ($12.99/mo or $99.99/yr CAD) unlocks unlimited tracking and the PDF/CSV export.
Frequently Asked Questions
Who has to pay tax instalments?
Anyone whose net tax owing (tax minus source withholding) exceeds $3,000 — approximately $1,800 in Quebec — in the current year and in either of the two preceding years. In practice: most established full-time freelancers, very few employees.
What happens if I skip an instalment?
Instalment interest, compounded daily at the prescribed rate, runs from the missed due date — even if you pay your full balance by April 30. Catching up early on a later quarter can partially offset it, and interest above $1,000 can attract an added penalty.
Can I pay less than the reminder says?
Yes — the reminders aren't binding. If your current-year tax will genuinely be lower, pay a quarter of your own estimate instead. Just understand the trade: deviating from the reminder amounts forfeits the no-interest guarantee, so an optimistic estimate becomes retroactive interest.
Do I pay instalments in my first year of self-employment?
Usually not — there's no qualifying prior year yet. Expect them to start in year two, alongside your first April balance. Save 25–30% of every payment from day one so both land softly.
Do instalments apply to GST/HST too?
Separately, yes — annual GST/HST filers with $3,000+ in net tax owe quarterly GST/HST instalments on their own schedule, paid to a different CRA account than income tax. Never mix the two.