Prescribed Interest Rates Rise To 3%

Owing money to CRA has just gotten a lot more expensive.  If you owe, you’ll pay interest at a rate of 7% effective October to December.   This represents an additional 1% increase over the July to August quarter which was, in turn, a 1% increase over the rate for the previous quarter.

Clearly, it’s getting more expensive to have a balance due with CRA.  Taxpayers who have an outstanding balance and do not have the cash may find it expedient to sell investments to pay CRA and then borrow the money from another source to repurchase the investments.  The interest charged by CRA is not tax deductible, but interest paid on money borrowed to earn investment income is.  If you’re in a 40% tax bracket, for example, deductible interest up to 11.5% is still less expensive than CRA’s 7% rate.

The prescribed rate is also:

• the minimum interest that must be charged on a spousal loan so that income earned from investment of the loan proceeds does not trigger the attribution rules; and
• the minimum rate that must be charged on employee or shareholder loans so that they do not result in a taxable benefit.

Spouses, employees, and shareholders have until the end of September to lock in loans at the current 2% rate before the rate jumps on October 1.