The period of relatively low Canada Revenue Agency interest rates on overdue taxes seems like a distant (and fond) memory. Those charges are now hitting an uncomfortably high level that creates potential new challenges for taxpayers.
Beginning in January 2024, CRA prescribed interest rates on overdue or outstanding balances will climb to 10 per cent—from 9 per cent this quarter—a rate unmatched since 2001. That’s in addition to potential late-filing or payment penalties that can also accrue interest fees. By comparison, the interest rate on outstanding balances was set at 5 per cent as recently as mid-2022.
To minimize the impact this increase could have on your corporate or personal finances, the advice is straightforward: ensure your taxes are paid on time and that you carry no outstanding balances. But this gradual interest rate hike presents an additional risk. Specifically, the CRA’s increasingly aggressive audit enforcement policies and tactics, along with the federal government’s proposed enhancement of the general anti-avoidance rule (GAAR), continue to enhance personal and corporate tax scrutiny.
Why? To start, the period to reassess tax returns will be gradually extended through the proposed GAAR rule changes. The current reassessment period for Canadian-controlled private corporations and individuals is up to three years once a notice of assessment is delivered, but will be extended by three years under the new GAAR unless a transaction is disclosed (in cases of suspected misrepresentation, the CRA currently has greater discretion to reassess tax filings beyond the normal reassessment period). GAAR penalties can reach as high as 25 per cent on outstanding tax balances.
The CRA is also increasing its touchpoints and reporting requirements through new regimes such as the Underused Housing Tax, mandatory disclosure and trust reporting rules. The potential for tax reporting errors and omissions is greater than ever. So, too, is the amount of information contained in taxpayers’ CRA files.
If the CRA reassesses your return and deems that an error has been made—or an act of wilful negligence has occurred—the agency’s retroactive application of daily-compounded interest can stretch back years to when the original outstanding taxes would have been due, along with any applicable penalties plus interest. When assessed based on the applicable quarterly interest rate when the taxes were due—escalating over that period of lateness and potentially topping out at 10 per cent—that becomes a very expensive threat. Increased CRA interest rates are also reason to rethink aggressive tax planning strategies, which are never advisable, but become far riskier if a reassessment disallows certain tax savings and a major repayment is required.
The new rate only underscores the need to stay a step ahead of your tax compliance obligations. Falling behind is now a far more costly proposition that could increase the odds of a stressful CRA audit.
For assistance with your tax management needs, contact a member of our team.
Armando Iannuzzi, Co-Managing Partner