The impact of rising interest rates by the Bank of Canada are being felt in many places, including the Canada Revenue Agency. Effective October 1st, the CRA prescribed base interest rate will be rising to 3% (currently at 2%) for the fourth quarter of 2022. The prescribed interest rate used by the CRA is tied to the average three-month Treasury Bill, therefore CRA does not have any discretion to lower or raise the prescribed rate. The rate was 1% as recently as March 2022, so has increased quite significantly throughout the year.
The 3% prescribed base rate is just one part of the interest rate increase for anyone owing taxes to the CRA. Interest charged by CRA on late tax payments is always 4% above the base prescribed rate. This means if you owe taxes, you will be charged 7% on your outstanding balance. Interest paid to CRA is also not tax deductible, so taxpayers do not get a break there. Settling the outstanding amount before September 30th, even if the amount is in dispute, may save you in the long run, especially as a further increase in the base prescribed rate during the first quarter of 2023 is not out of the question. And if you find yourself in the more fortunate position of being owed money by CRA, the prescribed interest rate for tax refunds is 2% above the base rate, making it 5% starting in October.
Spouses looking to take advantage of income-splitting loans can still lock in the 2% prescribed base rate for the entire length of their loan, if they complete the loan documentation before the end of the third quarter. Careful planning is required in this regard and professional advice should be sought.
For more information on income-splitting loans and if they are right for you, please contact Kody Wilson.
