More Relief: Prescribed Interest Rates Decrease July 1

Walter Harder

There’s more financial relief ahead for Canadians, as prescribed interest rates are set to decrease on July 1. That means shareholder loans, inter-spousal investment loans and other taxable benefits likely should be planned for Q3. 

 The prescribed interest rate is determined by the average rate on three-months treasury bill for the first month of the previous quarter, rounded up to the next whole percentage point.  The July to September 2020 rate will be based on the average rate for April 2020; which was 0.21%.  Rounding up, the prescribed rate for the third quarter will be 1%.The prescribed rate is used to determine a number of other rates:

• The interest rate charged on overdue taxes, Canada Pension Plan contributions, and employment insurance premiums will be 1%+4% premium = 5%.
• The interest rate to be paid on corporate taxpayer overpayments will be 1%.
• The interest rate to be paid on non-corporate taxpayer overpayments will be 1%+3% premium = 4%.
• The interest rate used to calculate taxable benefits for employees and shareholders from interestfree and low-interest loans will be 1%.

This means that, when interest is applied to outstanding balances for 2019 returns on September 1, the rate will be 5% compounded daily.

In addition, the prescribed rate is used to determine:

• The minimum rate payable on spousal loans in order to circumvent the attribution rules.
• The amount of interest that is a taxable benefit to employees or shareholders if they receive low-interest loans from a corporation.

For taxpayers anticipating making spousal loans for investment purposes, this means that any new loans should be postponed until July when the new 1% rate will apply.

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