Owe the Canada Revenue Agency for overdue tax? Your costs on that debt just rose.
The rate of interest the CRA charges on current or previous balances owing increased on Oct. 1 to 7%, up from 6%, representing the second consecutive quarter that the rate has risen by one percentage point.
The CRA charges interest if a taxpayer has a balance owing for a tax year and doesn’t pay it by April 30. Interest begins accumulating on May 1 and compounds daily.
Owing the CRA interest and penalties can wreak havoc on a client’s financial plans, said Scott Evans, a senior financial advisor with BlueShore Financial Credit Union in Vancouver.
“It’s a guaranteed [negative] return [and] it’s not tax deductible,” Evans said. With CRA charging interest at 7%, Evans said, someone in the top income tax bracket who chose to invest instead of paying the CRA would have to achieve a return of at least 15% on that investment to justify the decision.
The CRA also charges a late-filing penalty of 5% of your balance owing if you fail to file a tax return by the filing deadline of April 30 (or June 15 for the self-employed), plus an additional 1% for each month you file after the due date, to a maximum of 12 months.
If the CRA also charged a late-filing penalty in any of the previous three tax years, and asked that a taxpayer to file a return, the late filing penalty jumps to 10% of balance owing, with an additional 2% for each additional month to a maximum of 20 months.
Doug Carroll, a tax and estate specialist with Aviso Wealth in Toronto, said a taxpayer who disputes interest and penalties they owe the CRA should pay the amounts owing first, and then fight. Not paying and ultimately losing the battle to the CRA “will be really expensive,” Carroll said, as interest and penalties will have accumulated in the meantime.
On the other hand, if the taxpayer wins their battle, the CRA will have to return the amounts paid, plus interest. The CRA pays back interest at the base prescribed rate, plus two percentage points, which is 5% as of Oct. 1, up from 4% the quarter before.
That rate, as well as the rate the CRA charges on amounts owing is determined in the Income Tax Regulations. The rate charged on overdue tax is calculated by taking the “base” prescribed interest rate, which is 3% for the fourth quarter, and adding four percentage points.
The prescribed interest rate as well as the rate the CRA charges on amounts owed and owing for the first quarter of 2023 will be announced in mid-December, based on the average three-month T-bill rate in October.