CRA increases Q2 interest rates

The CRA has released the prescribed interest rates for amounts owing in Q2, with the rate for family loans rising from 1% to 2%.

The prescribed rate increase had been expected since January when the Bank of Canada raised its overnight rate. Since that time, advisors have been urging clients to take advantage of the 1% family loans before April.

Read: Last chance for family loans: prescribed rates to rise April 1

Prescribed rate loans can be used to split investment income with a spouse or common-law partner or other family member with lower income. One partner in a higher tax bracket, for example, can loan money to the partner in a lower bracket to invest, with the dividends taxed at the lower bracket.

The prescribed rate is determined quarterly by a formula in the Income Tax Regulations that calculates the average of three-month Government of Canada Treasury yields for the first month of the preceding quarter.

It’s the first increase since the prescribed rate dropped to 1% at the start of 2014.

The rates announced Thursday will be in effect April 1 to June 30. With most economists predicting more hikes from the central bank this year, “We could be stuck at the 2% rate for many months, if not years,” CIBC’s Jamie Golombek said in January. Or the prescribed rate could go even higher.

Read: How to keep splitting income with family members in 2018 and beyond

CRA announced the following rates:

• 6% on overdue taxes, CPP contributions and employment insurance premiums (up from 5% in Q1)
• 2% on corporate taxpayer overpayments (up from 1% in Q1)
• 4% on non-corporate taxpayer overpayments (up from 3% as Q1)
• 2% on taxable benefits for employees and shareholders from interest-free and low-interest loans (up from 1%)
• 5.18% for corporate taxpayers’ pertinent loans or indebtedness (up from 4.98%)

Read the full list of Q2 rates here.

Also read: What an interest rate rise would mean for prescribed loans

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.