CRA’s rate on overdue taxes will rise to 10 per cent, causing tax advisers to shift strategy

Open this photo in gallery:

The Canada Revenue Agency’s interest rate on overdue taxes will soon rise to 10 per cent, tax experts say, making paying back the agency more expensive and a greater priority for many individuals and already-stretched small business owners.

Until last year, the interest rate on unpaid taxes was low enough that it was not always a top financial priority, several accountants told The Globe and Mail. Since 2007, the rate has remained stable at five per cent or six per cent, a manageable level for most people.

But that has changed in recent months. In the second quarter of 2022, the interest rate on unpaid taxes started a steep incline, since then rising to nine per cent.

In the first quarter of 2024, barring any special CRA measures, the rate will climb from nine per cent to 10 per cent, double what it has been for most of the past decade. The CRA lists quarterly rates from 2006 onward on its current website, and this will be the first time since then the rate has reached double digits.

For many individual Canadians and business owners, it’s yet another cost straining their income and another burden stemming from high interest rates. The amount owed compounds daily, and the interest comes on top of other penalties for paying late.

“Even when it was five per cent, that was not fun. But sometimes that was a business decision for cash flow. Now, obviously that becomes a much more expensive decision,” said Tim Miron, an accountant and founder of Pursuit CPA Professional Corp., a business accounting firm in Burlington, Ont.

CRA spokesperson Nina Ioussoupova said the agency is still calculating the rate and will publish it “in the near future.”

However, the rate is calculated using a legislated formula published in Canada’s Income Tax Regulations, based on Government of Canada three-month Treasury bill yields. The yields used to calculate the interest rate for the first quarter of 2024 were published by Finance Canada on Nov. 1.

Joseph Devaney, an accountant and director at financial education platform Video Tax News who has calculated the coming hike, said taxpayers should prioritize paying back unpaid taxes earlier.

“This big increase snuck up on people. They just didn’t really take it too seriously until this year,” Mr. Devaney said.

Sharon Perry, a small business accountant and tax expert who runs Sharon Perry & Associates in Coquitlam, B.C., said the biggest change in her advice to clients is to start paying tax installments when asked by the CRA to avoid paying interest.

Tax installments are payments to the CRA made throughout the year to cover the taxes usually paid in April of the following year, similar to how an employer deducts tax directly from an employee’s paycheque. This particularly affects people who are self-employed, have rental or investment income, collect certain pension payments or have income from more than one job.

An individual taxpayer will be required by the CRA to pay installments if they satisfy two conditions: if their net tax in the current year will be more than $3,000, and their tax owing in either of the two previous years was more than $3,000. (In Quebec, these two figures are $1,800.) The CRA sends letters to people who will likely have to pay installments.

If the individual does not pay an installment, pays late or does not pay enough, the CRA will retroactively charge them interest.

Until now, Ms. Perry says, she has not pushed her clients to prepay installments if they are uncertain about whether they will reach the $3,000 threshold, as the interest charges for late payment were “manageable” if they did cross it. But with the rates doubled, the interest has become a much bigger problem, she said.

“My advice now is, ‘You really need to consider paying these however you possibly can, because the rates are significant,’” Ms. Perry said.

To avoid having to pay extra interest on inadequate installments, she recommends overpaying quarterly installments and paying early. By paying early, taxpayers actually earn some installment credit interest in return, though this can only be used to pay any other interest charges in the same year.

“If you are pretty sure that you won’t owe taxes at the end of 2023, you can skip all of the installment payments, but you better be right or else you are going to get hit by a large charge,” Mr. Devaney said. “Many people go this route and are then caught off guard when they receive a big and unexpected dividend or capital gain at year-end.”