Optimal Payment Strategy for Corporate Income Tax Instalments

Posted: 19 Sep 2000

See all articles by Glenn Feltham

Glenn Feltham

University of Saskatchewan - Accounting

Alan Macnaughton

University of Waterloo - School of Accounting and Finance


This paper formulates a theory of the optimal payment of Canadian corporate income tax instalments (the Canadian counterpart of US monthly payments of "estimated tax"). The theory incorporates uncertainty because the required amount of instalment payments depends in part upon the amount of the corporation's tax liability for the year, which is unknown at the time most or all of the instalment payments must be made. Taxpayers must balance the risks of overpayments and underpayments. Overpayments are undesirable since they constitute interest-free loans to the government; underpayments, on the other hand, result in nondeductible interest charges and possible penalties. The paper shows that the major factors affecting optimal payment amounts and their timing throughout the year are the probabilities of different amounts of tax liability, the taxpayer's cost of capital and the interest rate the government charges on underpayments. A key result is that it is often optimal for a taxpayer to delay making substantial amounts of instalment payments until late in the fiscal year (resulting in unstable government revenue streams and confusing government revenue projections). Linear programming can be used to provide numerical solutions for particular taxpayer situations.

JEL Classification: G38, H25

Suggested Citation

Feltham, Glenn and Macnaughton, Alan, Optimal Payment Strategy for Corporate Income Tax Instalments. Available at SSRN: https://ssrn.com/abstract=228802

Glenn Feltham (Contact Author)

University of Saskatchewan - Accounting ( email )

25 Campus Drive
Saskatoon, S7N 5A7, Saskatchewan
306-966-8402 (Phone)
306-966-2514 (Fax)

Alan Macnaughton

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
613-996-8267 (Phone)
613-943-5597 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics