CRA interest rate on overdue tax to hold steady in Q2

Based on Government of Canada three-month Treasury Bill yields through January, the prescribed interest rate used for loans to family members will continue to be 4% in the second quarter, the same as in Q1, and down from 5% in the last half of 2024.

The prescribed rate began rising in the third quarter of 2022; until then, the rate had been 1% for two years, with the rate charged on overdue tax at 5%. The prescribed rate hit 6% in the first half of 2024 before beginning to drop.

On Jan. 1, the CRA began charging 8% interest on overdue taxes, down from 9% in the second half of 2024.

The CRA charges interest, compounded daily, on overdue taxes. It may also impose penalties — for late filing, for example — 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. Loans could be made directly to a family member or to a family trust, which can then make distributions to family members in lower tax brackets as part of a properly executed prescribed-rate loan strategy.

The lower the prescribed rate, the greater the potential for income splitting using a 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within 30 days of year-end, the loan can remain in effect at the prescribed rate that was current when the loan was originally made. For example, some pre-2023 quarters had prescribed rates lower than the current 4%. Also, 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 2024, the payment deadline was Thursday.

Taxpayers using a prescribed-rate loan strategy at a rate greater than 4% may want to consider dismantling their current structure and take advantage of the lower prescribed rate in 2025. But amending the interest rate on an existing loan is typically insufficient to lock in a new rate, RSM Canada LLP says in an article.

“Instead, the debtor would need to liquidate their investments, incur the relevant tax implications due to the sale, repay the existing loan and introduce a new loan carrying the new prescribed rate,” the RSM article says. “Taxpayers considering this would need to model the triggered tax costs associated with liquidation against the possible tax benefits from re-establishing a new loan.”

Prescribed-rate calculation

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 yield for three-month T-Bills was 3.13% on Jan. 14 and 2.96% on Jan. 28. As the average of those yields is 3.04%, the prescribed rate will be 4% for the second quarter of 2025.