Blog · Tax
Things are getting expensive these days courtesy of inflation and government debt / stimulus that flooded the economy over the past few years due to COVID. I talked to one client recently who recognized the stress of the situation but also recognized that this is so much harder for those who are not in the comfortable position he is in. One of these groups, of course, is those who have cash-flow crunches or have fallen behind on their CRA payments.
Tip: If you want to see if CRA will accept your payment arrangements, they have a useful Payment Arrangement Calculator — you can use it to see whether what you are going to propose may be accepted.
Now, how about those interest rates being charged by CRA… but before we get there, how are they calculated? Well, the first thing is they come up with the prescribed rate, which is set quarterly (Jan–Mar, Apr–Jun, Jul–Sep, Oct–Dec). The rate is set for the next quarter based on the simple average of three-month Treasury bills for the first month of the preceding quarter, rounded up to the next highest whole percentage point. You can view them on the Bank of Canada T-bill yields page.
So if you take October 2022, you will see it is just under 4%; as a result, the rate will be 4% (rounded up) for January–March 2023.
Okay — so now that we know where the prescribed rate comes from, here is how it impacts you:
If you want to check the current rates, use the CRA's prescribed interest rates page.
Currently, for income tax, only Alberta and Quebec have their own tax collectors. Their rates are NOT the same as the Federal rate and are in fact higher — so pay them first!
The interest rate that applies to amounts owed to Revenu Québec is determined on the basis of the mean of the base rates for bank loans to businesses. These rates are published by the Bank of Canada on the last Wednesday of the second month of each quarter and take effect the following quarter. The result is rounded off to the nearest whole number (with one-half being rounded down) and increased by 3%. You can see the Quebec posted rates here — to give an idea, their rate for Q4 2022 is 7%, while the CRA rate for Q4 2022 is also 7% even though they are calculated differently.
"The rate used in the calculation of interest charges and credits is determined quarterly. The interest rate is based on a 'reference rate' (the average interest rate, rounded up, on 90-day treasury bills during the first month of the preceding calendar quarter). The debit interest rate on net deficient instalments is three and one-half percentage points above the reference rate, and the credit interest rate is equal to the reference rate multiplied by 50 per cent."
So if the reference rate was 4%, the amount charged would be 7.5% (4% + 3.5%) and the amount paid on refunds would be 2% (4% × 50%). So in essence, Alberta should always be paid first!