The CRA has increased this interest rate and it's costing some people BIG time
Haven’t paid your taxes? You might want to be prepared for a bit of a shock if that’s the case because of some big changes brought in by the Canada Revenue Agency (CRA) this year.
It’s called the prescribed annual interest rate, and it might be familiar to you if you are self-employed and you are contributing to the Canada Pension Plan. It also applies to you if your main source of income is farming or fishing, or if the calculation chart provided by the CRA determines you need to pay your taxes that way.
Many Uber or Lyft drivers, for example, are required to make payments quarterly.
That part isn’t new. What is new, however, is that the prescribed annual interest has risen significantly, arguably quietly, and we asked the CRA why.
The CRA charges a mandated rate of interest on late income tax payments after April 30 (when your taxes are due), and also on late instalment payments.
For instalment payments, the new rate is 9%, which is a 1% jump from where it was before tax season, but 80% higher than the rate 12 months ago. It was at a historic low in 2020, while interest rates were low, which is no longer the case.
“The interest rate has increased by approximately four percentage points since the second quarter of 2022 because the average rate on three-month treasury bills has increased by about four percentage points over the same period,” Nina Ioussoupova with the CRA said.
The rates have been steadily increasing a small amount, which may have been ignored by taxpayers, but could have a major impact on your bottom line if you are dinged as a result.
For example, for a self-employed person who owes $30,000 in taxes and self-employed CPP deductions, the interest is now over $2,000, up $900 from a year ago.
“The prescribed interest rate is based on the average rate of three-month treasury bills sold during the first month of the previous quarter. For late or insufficient payments, the rate is rounded to the next higher whole percentage point plus four percentage points,” the CRA told Daily Hive.
Many people (probably most) ignore the instalment payment notice because, although it is required, it has no real penalty, just the interest. But that could be a lot of money if you ignore it now.
The message? Don’t be late.
“When a taxpayer files their return late, they may be subject to late-filing penalties in addition to any interest on amounts they owe. Interest is not the same as penalties that are charged when a taxpayer files their income tax return late,” according to the CRA. To learn more about the differences and if you are required to pay in instalments, head to the website.
The 9% rate will be in effect from April 1, 2023, to at least September 30, 2023, (when it could rise again), so if you are among those facing a big interest amount, it might be time to get the calculator out and make that online deposit.
Don’t have to pay in instalments but you still didn’t file this year? The late-filing penalty is 5% of your 2022 balance owing, plus an additional 1% for each full month that you file after the due date, to a maximum of 12 months, the CRA says.