Interest Rate Steady: What It Means for Taxpayers

Evelyn Jacks

Need some positivity in your life? The  new Bank of Canada Governor, Tiff Macklem announced yesterday that the benchmark interest rate would remain 0.25% (where it’s been since March) and will do so until the 2% inflation target is reached, which might take at least two years, according to their Monetary Policy Report.  But there is more good news:

It is anticipated that approximately 40% of the collapse in the first half of the year will be made up for in the third quarter of 2020 as the economy restarts.

According to the report, the expected annual inflation rate for 2020 is 0.6%, increasing to 1.2% in 2021 and 1.7% in 2022. It also indicated that between April and June, Canada’s GDP was reduced by 15%.

How does this affect taxpayers?  For one thing, the prescribed interest rate will likely remain at 1%, which means that overdue tax remittances will attract an interest penalty of 5%. 

We asked our Master Tax Instructor, Walter Harder, how this works. “The prescribed interest rate is set by the average rate on 3-month treasury bills during the first month of the preceding quarter.  So, the rate for September to December will be based on the average rate in July.  Right now, that’s running at less than 0.2% and, based on Mr. Macklem’s announcement, that’s not going to be increasing any time soon.  The average bond rate is rounded up to the nearest whole percentage point so the September to December rate is expected to remain at 1%.  For interest payable on overdue taxes and instalments, the government adds 4% to the prescribed rate so the rate on amounts due to the government by individuals will be 5% for the foreseeable future.”

And now why is this important?  Because personal tax balances due fall on September 1 and those who don’t file by the deadline need to understand the consequences. Late filers beware:  unless there’s a legitimate hardship recognized by CRA, you’ll also face a 5% late filing penalty, plus 1% for each full month the return is filed after September 1.  If you were assessed a late filing penalty in any of the last three years, your late filing penalty will be doubled for your 2019 return.

Some tax tips:  be sure to file before September 1, even if you can’t pay the balance due.  This will prevent the government from applying the late filing penalty although your balance due will accrue interest starting September 1 at 5% per annum, compounded daily.  In this low-interest-rate environment, it may make sense to borrow to pay the government – if you can borrow at a rate less than 5%.   

Also remember the September 15 quarterly instalment payment is due right after this.  If your income dropped in 2020 (which is likely for many), you may wish to reduce your instalment payments, based on new estimated taxes.     

Additional educational resources: Come to the September 30 CE Summits for further discussion and information on "Financial Fallout: Audits and Bankruptcies"

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