Prescribed rate to stay at 5% in Q4

The prescribed rate is set to remain at 5% and the interest rate the Canada Revenue Agency (CRA) charges on late payments will remain at 9% in the fourth quarter of 2023, based on Government of Canada three-month Treasury bill yields through July.

The fourth quarter will be the third in a row with a prescribed rate of 5%. The rate the CRA charges on overdue tax, Canada Pension Plan contributions and employment insurance premiums is set four percentage points higher than the prescribed rate.

Before rates began rising in the third quarter of 2022, the prescribed rate had been 1%, and the amount charged on overdue taxes 5%, for two years.

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

Why the prescribed rate is holding steady

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 4.95% on July 4 and 5.03% on July 18. As the average of those two yields is 4.99%, the prescribed rate will remain 5% for the fourth quarter of 2023.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.