Tax debts soon more expensive

1ah July the “prescribed rates” will be increased. As a result, all of our outstanding government bills will cost more.

Among other…

What are mandatory rates? How do they affect us?

A series of increasing rates

Each quarter, the Canada Revenue Agency (CRA) reviews a set of rates that apply to debt and transactions of all kinds, including what individuals owe it and amounts it owes to taxpayers.

I say “rework”, but actually it depends. The CRA bases the benchmark interest rate requirement on the average 90-day Treasury bill rate for the first month of the preceding quarter, and then rounds up to the next higher percentage point.

In April, 90-day Treasury bills broke through 1% (1.2% to be exact). The prescribed reference interest rate will therefore rise from 1% to 2% this Friday.

This comes as no surprise to anyone following the performance of Canadian debt.

This interest rate must apply to certain loans between individuals. It is also used, among other things, to calculate the taxable benefit of an employee who takes out an interest-free loan from his employer.

When the reference interest rate increases, it drives all other prescribed interest rates. Example: Interest on federal tax arrears is the guide rate plus 4%. Therefore, interest on tax debt will increase from 5% to 6%. For debts that the government might owe us, the rate goes from 3% to 4%.

Significant impact on income splitting

Tax professionals and accountants are monitoring the evolution of the statutory rate as it impacts their clients who employ spousal income sharing strategies. The aim is to reduce the tax burden for a couple.

For such a strategy to be effective, there must be a significant income gap between the spouses. The more heavily taxed of the two then lends to the lesser to invest that money. Taxation of investment gains will be in the hands of the spouse, who enjoys a lower tax rate. For this strategy to work, the lender must report interest income at the prescribed rate (2%).

“The interest must be paid and the spouse who pays it can deduct this cost from the income generated by the investments,” explains CPA Éric Brazeau. Over several years, the tax savings can be significant, he says.

Failure to comply with this rule will result in the income being taxed by the person who provided the loan, rendering the operation useless.

If the prescribed interest rate increases, this does not affect existing loans, but new ones. Income splitting between spouses then becomes somewhat less effective.

One will agree that the business news is full of more serious issues.

The methodology for determining applicable interest on debt to Revenu Québec (RQ) differs from that used by the CRA.

“The interest rate is determined by the average of the base interest rates for bank loans granted to companies. These rates are published by the Bank of Canada on the last Wednesday of the second month of each quarter and take effect in the following quarter. The result is rounded to the nearest whole number, with half being rounded down to the nearest whole number. Also, it will be increased by 3%,” explains on the RQ website.

The rates are often the same, but sometimes the provincial tax rate is higher. Currently they are identical.

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