In the wake of its doubling on July 1st, 2022, the Canada Revenue Agency’s prescribed rate will increase to 3 per cent on September 30th of this year. The rate, which sets interest rates for everything from tax refunds to outstanding tax debts, is currently set at 2 per cent.
The prescribed interest rate is determined based on the 90-day average treasury bill yield and is set on a quarterly basis. As we noted in a recent blog, the rate had remained steady at 1 per cent for two years beginning on July 1st, 2020, as interest rates hovered at historic lows throughout the coronavirus pandemic. This set the stage for tax-planning opportunities for business owners or individuals that could benefit from making inter-family loans for investment purposes (e.g., from family members earning at the highest tax-bracket to lower income-earning family members).
How? A properly structured loan made at the minimum prescribed rate can facilitate income-splitting within families, bypassing normal attribution rules that would require income or capital gains earned on the transfer of property or assets (such as cash or shares) to be applied to the income of the family member who has made the property transfer (e.g., a parent gifting equities to their child). Using this strategy, investment income/gains can potentially be attributed to lower-earning family members who receive a loan at the prescribed rate, thereby reducing the family’s tax liability on that investment income. The annual interest on the loan must be paid by January 30th of the year after the loan is made, and each year thereafter.
The prescribed rate also affects the interest rate on:
- Non-corporate taxpayer overpayments
- Canada Pension plan contributions and Employment Insurance premiums
- Corporate taxpayer overpayments
- Corporate taxpayer’s pertinent loans or indebtedness
The 2 per cent increase in a single calendar year is especially significant for individuals or corporations that maintain a tax liability to the CRA. Any outstanding tax debts will now be significantly more expensive to service. Individuals or organizations in those circumstances have an opportunity to address those liabilities before the rate hike comes into effect this fall.
Contact a member of our team to discuss the impact that the latest increase to the prescribed rate could have on your personal or corporate financial situation.
Armando Iannuzzi, Co-Managing Partner
For other tax-planning assistance, contact a member of our team.