The Canada Revenue Agency (CRA) will charge 9% interest on late payments in the third quarter, down from the 10% rate it has been charging through the first half of 2024.
The rate charged on overdue tax is set four percentage points higher than the prescribed rate on family loans.
Based on Government of Canada three-month Treasury bill yields through April, the prescribed interest rate used for loans to family members will be 5% in the third quarter.
On Jan. 1, the CRA began charging 10% interest on overdue taxes, up from 9%, which had been the rate through the previous quarter. The last time the CRA had charged interest at 10% was the second quarter of 2001.
Prescribed interest rates began rising in the third quarter of 2022 as a result of increasing rate of inflation, albeit with a lag. Before then, the prescribed rate for loans to family members had been 1%, and the rate charged on overdue tax 5%, for two years.
The CRA charges interest, compounded daily, on overdue taxes. The interest the CRA charges on an overdue amount over time will reflect the prescribed rates for each quarter over that period. The CRA may also impose penalties, for example, for late filing, as well as interest on the penalties.
The general deadline for filing a 2023 tax return and paying a tax balance owing is April 30. For the self-employed, the filing deadline is June 15, but a balance owing for 2023 is due April 30.
Prescribed-rate loans
Prescribed-rate loans can be used to split investment income with a spouse, common-law partner or other family member. However, as the prescribed rate rises, so too must the expected investment return to make the strategy viable.
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.
As long as annual interest is paid within 30 days of year-end, the loan can remain in effect at the prescribed rate that was current when the loan was originally made. Failure to pay by the deadline will result in any investment income earned on the loan being attributed back to the lender for the year the interest was incurred — and all subsequent years.
Why the prescribed rate is dropping
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 4.98% on April 9 and 4.94% on April 23. As the average of those two yields is 4.96%, the prescribed rate will be 5% for the third quarter of 2024.