Tax Tip: What’s Deductible When Interest Rates Rise?

With the prescribed interest rate doubling to 2% as of April 1, there will be a significant impact on Canadians who face overdue tax balances with the CRA.  It follows that understanding what interest costs are deductible and which are not, is of new interest.  This subject is one that qualified tax and financial advisors will be prepared to discuss with clients as we tee up for the busiest month of tax season.

What’s changing.  The April 30 CRA remittance deadline is fast approaching, and the CRA has confirmed that our Q2 interest rate forecast has been implemented with the rates anticipated, as we reported last week. With the prescribed interest rate doubling, there will be a significant impact to those with overdue taxes, as the overdue remittance rate now sits at 6 percent. That scenario gets much worse for those who have overdue taxes from previous tax years. It could, in fact, be less expensive, in fact, to borrow from the bank to pay up the taxman.

Will those interest costs be deductible?  To answer that question, it’s important to understand Section 67.6 of the Income Tax Act, which generally prohibits the deduction of a fine or penalty imposed under a federal, provincial, municipal or foreign law.

Further, and more specifically, paragraph 18(1)(t) prohibits the deduction of any amount paid or payable under the Income Tax Act (such as income tax, fines, penalties and interest), with the a few exceptions under Part XII.2 or Part XII.6.  Paragraph 18(1)(t) also makes sure you can’t deduct any amount paid or payable as interest under the Goods and Services Tax.

Objections and Appeals Bring Relief.  There is a bit of good news for those who owe:  under paragraph 60(o) of the Act, taxpayers may claim a deduction for costs incurred to prepare, an objection or appeal to an assessment of tax, interest or penalties under the Income Tax Act, provincial taxes imposed under the Act or foreign tax credits, including any interest or penalty relating to such assessment.

You can check this out in Folio S4-F2-C1, or better yet, first things first:  make sure you meet the tax filing deadline of April 30 and pay taxes owed. If you need assistance resolving overdue tax issues, a Distinguished Financial Advisor – Tax Services Specialist can help.

Next Time:  More on Carrying Charges – what’s deductible and what’s not.

Evelyn Jacks is President of Knowledge Bureau. She has just released a new book entitled Essential Tax Facts: How to Make the Right Tax Moves and Be Audit-Proof, Too available now at this link!

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