Canada Revenue Agency (CRA) will begin charging 10% on late payments in the first quarter of 2024, up from 9% currently.
The prescribed rate the CRA charges on overdue tax is set four percentage points higher than the prescribed rate for family loans.
Based on Government of Canada three-month Treasury bill yields through October, the prescribed interest rate used for loans to family members will rise to 6%, up from 5% in the current and previous two quarters.
The CRA charges interest and compounds it daily on late payments. The interest rate the CRA charges on current or previous overdue balances changes each quarter if the prescribed rate for overdue tax changes.
Prescribed interest rates began rising in the third quarter of 2022 as inflation rose. Before then, the prescribed rate for loans to family members had been 1%, and the rate charged on overdue tax 5%, for two years.
Prescribed-rate loans
Prescribed-rate loans can be used to split investment income with a spouse, common-law partner or other family member.
Loans could be made directly to a family member or to a family trust, which can then make distributions to family members in low tax brackets as part of a properly executed prescribed-rate loan strategy.
However, as the prescribed rate rises, so too must the expected investment return to make the strategy viable.
Why the prescribed rate is rising
The prescribed rate is calculated every quarter.
According to section 4301 of the Income Tax Regulations, the prescribed rate is based on the average yield of Government of Canada three-month Treasury bills auctioned in the first month of the preceding quarter, rounded up to the next whole percentage.
The auction yields for three-month T-bills were 5.16% on Oct. 10 and 5.16% on Oct. 24. As the average of those two yields is 5.16%, the prescribed rate will rise to 6% for the first quarter of 2024.