CRA to charge 10% interest on overdue tax through first half of 2024

The Canada Revenue Agency (CRA) will continue charging 10% interest on late payments in the second quarter of 2024, the highest rate of interest charged on overdue tax in over 20 years.

The rate charged on overdue tax is set four percentage points higher than the prescribed rate on family loans.

Based on Government of Canada three-month Treasury bill yields through January, the prescribed interest rate used for loans to family members will be 6% in the second quarter, identical to the rate for the current quarter.

On Jan. 1, the CRA began charging 10% interest on overdue taxes, up from 9%, which had been the rate through the previous quarter. The last time the CRA charged interest at 10% was the second quarter of 2001.

Prescribed interest rates began rising in the third quarter of 2022 along with inflation. Before then, the prescribed rate for loans to family members had been 1%, and the rate charged on overdue tax 5%, for two years.

The CRA charges interest, compounded daily, on overdue taxes. It may also impose penalties, as well as interest on the penalties.

Prescribed-rate loans

Prescribed-rate loans can be used to split investment income with a spouse, common-law partner or other family member. However, as the prescribed rate rises, so too must the expected investment return to make the strategy viable.

Loans could be made directly to a family member or to a family trust, which can then make distributions to family members in low tax brackets as part of a properly executed prescribed-rate loan strategy.

As long as annual interest is paid within 30 days of year-end, the loan can remain in effect at the prescribed rate that was current when the loan was originally made. Failure to pay by the deadline will result in any investment income earned on the loan being attributed back to the lender for the year the interest was incurred — and all subsequent years.

For loans that were outstanding in 2023, the payment deadline was yesterday.

Why the prescribed rate is holding steady

The prescribed rate is calculated every quarter.

According to section 4301 of the Income Tax Regulations, the prescribed rate is based on the average yield of Government of Canada three-month Treasury bills auctioned in the first month of the preceding quarter, rounded up to the next whole percentage.

The auction yields for three-month T-bills were 5.04% on Jan. 2, 5.04% on Jan. 16 and 5.03% on Jan. 30. As the average of those three yields is 5.04%, the prescribed rate will be 6% for the second quarter of 2024.