Prescribed Interest Rates Remain the Same – Except for PLOI

The prescribed interest rates for October 1 to December 31, 2015, remain unchanged on overdue taxes and tax overpayments, and for calculations of taxable benefits and shareholder loans. However, the interest rates on PLOI – Pertinent Loans or Indebtedness –have been reduced this quarter.

Prescribed interest rates are calculated quarterly, based on changes in the yield on 90-day Treasury Bills (average for first month of preceding quarter) plus adjustments of 2% for taxes payable by CRA and 4% for taxes outstanding to the CRA.  The categories and rates are:

• 1% - interest rate used to calculate taxable benefits from interest-free and low-interest loans provided to employees and shareholders. In addition, this rate is used when corporate taxpayers make overpayments to the CRA.
• 3% - interest rate used to calculate payments by CRA for tax overpayments made by other taxpayers.
• 4.52% - interest rate used to calculate interest on pertinent loans or indebtedness.
• 5% - interest charged by CRA on any overdue taxes owed by taxpayers on income taxes, Canada Pension Plan contributions, and EI premiums.

PLOI – Pertinent Loans or Indebtedness – can occur when a loan is received by a non-resident corporation from a corporation resident in Canada, that is controlled by the debtor or other non-arm’s length person. It can also occur when there is an amount owing to the Canadian resident corporation from a foreign affiliate of the Canadian resident corporation that is controlled by a non-resident corporation.

Instead of being treated as deemed dividends, on which a withholding tax would be required, the Canadian resident corporation and the non-resident corporation may file an election for the debt to be a PLOI. In that case, the debt is subject to a deemed interest rule under section 17.1 of the Income Tax Act.  CRA first listed prescribed interest rates for this type of debt in the fourth quarter of 2013. The deemed interest rules may be used for shareholder loans and foreign affiliate dumping rules.