How does the CRA calculate instalment interest, and when does the penalty kick in?
The CRA charges instalment interest at the prescribed rate, 7% in every quarter of 2026, compounded daily on each late or short instalment from its due date to the balance due date. Early or extra payments earn credit interest that offsets it. Charges of $25 or less aren't billed, and a penalty applies only above $1,000 of interest.
What the CRA charges on instalments in 2026
Instalment interest runs at the prescribed rate for overdue taxes. That rate was 7% in each quarter of 2026, including the quarter running October 1 to December 31, 2026 canada.ca. It compounds daily, and the rate can change every three months
canada.ca. For the full rate history, see the 2026 prescribed rates.
| Rule | Individuals | Corporations |
|---|---|---|
| Who pays | Net tax owing over $3,000 ($1,800 in Quebec) for 2026 and for 2025 or 2024 | Tax payable over $3,000 for both the current and the previous year |
| Due dates | March 15, June 15, September 15, December 15 | Monthly, or quarterly for an eligible small CCPC |
| Rate, 2026 | 7%, compounded daily | 7%, compounded daily |
| Early or extra payments | Earn credit interest that offsets the charge, never refunded | Same offset method, never refunded |
| Minimum charge | Not billed at $25 or less | $25 or less of total penalty and interest is cancelled once the tax is paid |
| Instalment penalty | Only when instalment interest is over $1,000 | Same formula under ITA 163.1 |
The charge itself is a subtraction. The CRA works out interest on each instalment your client should have paid, from its due date to the balance due date, using whichever option gives the least interest. It then works out interest on each payment actually made, from the payment date (or January 1, if later) to the same date. The difference is the charge, if it's more than $25 canada.ca.
Who has to pay instalments
An individual pays instalments for 2026 when net tax owing is more than $3,000 for 2026 and also for either 2025 or 2024. The Quebec threshold is $1,800, and the province is wherever your client lived on December 31 canada.ca.
Reminders arrive twice a year: the February reminder covers March and June, and the August reminder covers September and December. A reminder doesn't create the obligation. If your client's 2026 net tax owing ends up at or below the threshold, they don't have to pay instalments for 2026 canada.ca.
If a due date lands on a weekend or a public holiday, a payment received on the next business day counts as on time. A client whose main income is farming or fishing has a single due date, December 31 canada.ca.
The three options, and why the reminder amount is the safe one
Your client can base instalments on any of three options canada.ca. Interest is then measured against the option that produces the least interest, which is why paying the amounts on the CRA reminder on time protects them even when the year's tax turns out higher.
| Option | Amount based on | Best when | Interest risk |
|---|---|---|---|
| No calculation | Latest assessed return; the amount is printed on the reminder | Income stays about the same each year | None if the reminder amounts are paid in full by the due dates |
| Prior year | 2025 return, worked on the CRA chart | 2026 looks like 2025 but differs a lot from 2024 | None unless the estimate is too low |
| Current year | Estimated 2026 net tax owing, plus CPP and voluntary EI payable | 2026 differs a lot from both earlier years | Interest on any shortfall if the estimate is too low |
The legal basis is ITA 161(4.01): for interest purposes, an individual's required instalments are deemed to be the lowest total among the instalment base methods and the amounts stated in the Minister's notice laws-lois.justice.gc.ca. The current year option carries the risk. If your client underestimates, interest runs on the gap from each due date.
Worked example: a late June instalment and an offset
Your client's reminders call for $4,000 each quarter for 2026. They miss June 15 and pay that $4,000 on September 14, 91 days late. At 7% compounded daily, the late period costs $4,000 × ((1 + 0.07 ÷ 365)^91 − 1) = $70.41.
That interest keeps compounding until the balance due date, April 30, 2027. If the rate stayed at 7%, the charge would reach about $73.56. Now suppose your client also pays the December 15 instalment early, on September 15, 91 days ahead. That early payment earns credit interest at the same rate.
| Scenario | Interest effect | Net charge |
|---|---|---|
| June paid 91 days late, nothing else changes | About $73.56 to April 30, 2027 | About $73.56 |
| Same, plus December paid 91 days early | Credit interest nearly matches the charge | About $1.29, under $25, so not billed |
| June paid on time | None | $0 |
This is the offset method. The credit interest can only reduce interest on late or short payments for the same tax year, and it is never refunded canada.ca. The 2027 figures above assume 7% holds into 2027; the CRA publishes each quarter's rate before the quarter begins.
The instalment penalty
The penalty is 50% of the amount by which the year's instalment interest exceeds the greater of $1,000 and 25% of the interest that would have been charged if no instalments had been made at all laws-lois.justice.gc.ca. At $1,000 of interest or less, there's no penalty
canada.ca.
| Step | Client A | Client B |
|---|---|---|
| Actual 2026 instalment interest | $1,800 | $2,400 |
| Interest if no instalments were paid | $3,000 | $6,000 |
| 25% of that | $750 | $1,500 |
| Greater of $1,000 and 25% | $1,000 | $1,500 |
| Excess | $800 | $900 |
| Penalty, half the excess | $400 | $450 |
A client who paid nothing all year has actual interest equal to the no payment interest, so once that interest passes $4,000 the 25% test sets the floor and the penalty works out to 37.5% of the interest. Partial payments shrink the penalty fast, because the floor is measured against the no payment figure.
Corporations: monthly or quarterly
A corporation doesn't pay instalments when its tax payable is $3,000 or less for either the current or the previous tax year canada.ca. Otherwise it pays monthly; in the CRA's example, each instalment is due by the last day of each month of the tax year
canada.ca.
A CCPC can pay quarterly if, with its associated corporations, taxable income is $500,000 or less for the current or previous year, taxable capital employed in Canada is $10 million or less, and its compliance history is perfect for the 12 months ending when its last instalment was due canada.ca. The Act adds one more test: it must have claimed the small business deduction for the current or previous year
laws-lois.justice.gc.ca.
Corporate instalment interest also compounds daily at the prescribed rate and uses the same offset method, with the offset never refunded. Arrears interest then runs on the instalment penalty from the balance due day until it's paid canada.ca. Once the balance is overdue, regular arrears interest takes over; see the CRA rate on overdue taxes.
Sources
Is instalment interest deductible?
No. Paragraph 18(1)(t) of the Income Tax Act denies a deduction for any amount paid or payable under the Act, and instalment interest is charged under section 161 laws-lois.justice.gc.ca.
Can credit interest from overpaying 2026 instalments reduce 2027 interest?
No. Instalment credit interest only offsets interest on late or short payments for the same tax year, and the CRA never refunds it canada.ca.
When is the balance due date that interest runs to?
April 30 of the following year for individuals, even for a sole proprietor who can file by June 15. For the 2025 year, the CRA lists April 30, 2026 as the payment deadline and June 15, 2026 as the filing deadline for the self employed canada.ca. See the sole proprietor deadline page.
Did the instalment rate change during 2026?
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.