Example
This is an example of how we calculate instalment interest and penalty using the offset method.
Corporation D has a December 31 year end and has to make monthly instalment payments of $75,000 starting in January 2019.
Corporation D only makes two instalment payments in the year. It makes one payment of $120,000 on March 12 and a second payment of $150,000 on April 25.
Therefore, when we assess Corporation D’s return, we will charge $16,175.00 in instalment interest. We used an underpayment interest rate of 5% compounded daily in the following calculation.
| Date 2019 | Instalment payment due ($) | Payment received ($) | Balance ($) | Number of days | Interest ($) |
|---|---|---|---|---|---|
| January 31 | 75,000 | 75,000.00 | 28 | 288.20 | |
| February 28 | 75,000 | 150,288.20 | 12 | 247.24 | |
| March 12 | 120,000 | 30,535.44 | 19 | 79.57 | |
| March 31 | 75,000 | 105,615.01 | 25 | 362.29 | |
| April 25 | 150,000 | (44,022.70) | 5 | (30.16) | |
| April 30 | 75,000 | 30,947.14 | 31 | 131.69 | |
| May 31 | 75,000 | 106,078.83 | 30 | 436.81 | |
| June 30 | 75,000 | 181,515.64 | 31 | 772.41 | |
| July 31 | 75,000 | 257,288.05 | 31 | 1,094.84 | |
| August 31 | 75,000 | 333,382.89 | 30 | 1,372.79 | |
| September 30 | 75,000 | 409,755.68 | 31 | 1,743.64 | |
| October 31 | 75,000 | 486,499.32 | 30 | 2,003.29 | |
| November 30 | 75,000 | 563,502.61 | 31 | 2,397.88 | |
| December 31 | 75,000 | 640,900.49 | 60 | 5,274.51 |
The total instalment interest we will charge Corporation A on its balance-due day of February 28, 2020 is $16,175.00.
Penalty
Based on Corporation D’s instalment interest of $16,175.00, we will assess a penalty of $4,507.82 as follows:
| Description | Amount |
|---|---|
| Instalment interest | $16,175.00 |
| Minus the greater of: $1,000, and 25% of the instalment interest charged if Corporation A had made no payment at all ($28,637.40 × 25%) | $7,159.35 |
| Difference | $9,015.65 |
| Instalment penalty (one-half of the difference) | $4,507.82 |