Watch out, the CRA’s prescribed interest rate, if you owe tax, is now 9%.
As interest rates rise, so does the cost of paying taxes late. From April 1 to June 30 2023, the rate on overdue taxes is 9%, compounded daily[1]. Not only is this costly, but the interest is not deductible. Borrowing to pay tax is also not deductible.
Paying on time will save interest but what are the precise rules on due dates?
Individuals
Balance Payable:
April 30 (May 1 this year as April 30 is Sunday).
If you have business income, filing due date for you and spouse / common-law partner is June 15 but tax is still due April 30.
There is an exception on death where the balance payable is due not earlier than 6 months after death (relevant only if death was after October)[2].
Instalments:
Quarterly: 15 March, 15 June, 15 September, 15 December
3 choices for quarterly payments:
· ¼ of current year tax less amounts withheld at source (e.g., payroll)
· ¼ of previous year’s tax
· March 15, June 15 at ¼ of second previous year’s tax with September 15 and December 15 instalments adjusted to previous year basis.
Interest will be charged if ALL the following apply:
· You are required to pay instalments;
· You receive an instalment reminder showing an amount to pay; and
· You did not make any payments, paid late or paid less than was required.
The CRA will not pay interest on excess instalments but will apply instalment credit interest on excess or early instalments, against interest charged on deficient or late instalments. For instance, if you fail to make an instalment on time, you can “catch up” by overpaying your next instalment or paying your next instalment early.
Following the CRA instalment reminders is a safe practice but can result in overpayment if your tax for the current year is lower. For individuals, the interest rate on overpayments is 2% less than interest on underpayments and no interest is paid until after the latest of May 30, the 30th day after you file your return, or the day after you overpaid your taxes.
Trusts
Balance Payable:
90 days after year-end.
Instalments:
Although by law instalments are required, no system is in place for this and no interest is currently charged in practice.
Corporations
Balance Payable:
2 months after year-end.
Exception for Canadian-controlled private corporation, to 3 months after year-end if:
· It is a CCPC throughout the year
· amount claimed under small business deduction (federally) for current or previous year[3]; and
· income for previous year does not exceed business limit (generally $500,000 allocated across associated companies).
Instalments:
12 instalments at month-end in one of 3 ways:
· 1/12 of current year’s tax;
· 1/12 of previous year’s tax; or
· 1/12 of second previous year’s tax for first 2 months and 1/10 of previous year’s tax for next 10 months.
Small CCPCs may pay quarterly instalments if the 4 following conditions apply:
· It has a perfect compliance history
· It has claimed the small business deduction in the year or prior year,
For the associated group:
· For the year or previous year, had under $500,000 taxable income;
· taxable capital was under $10 million in the current or prior year;
· some amount claimed under the federal small business deduction for the current or previous tax year; and
·all tax filings for income tax and HST have been made on time throughout the twelve months preceding the current quarter. For example, a calendar year-end corporation would not be eligible for a quarterly payment after June 30 (i.e., September 30) if it had not met these tests in any of the twelve months prior to July 1.
Important:
Part IV tax is not included in the instalment base. It is paid in full with the balance payable at that time.
A dividend refund does not reduce a previous year’s instalment base but can be deducted in determining current year tax payable and thus will factor into the current year’s instalment requirements
For corporations, the interest on overpayments is 4% less than the interest on underpayments and no interest is paid until the latest of the 120th day after the end of the tax year[4], the 30th day after late filing a tax return or the date of the overpayment.
Some Further Points
Interest is not paid on a loss carry back until it is claimed. Meanwhile tax if any unpaid from the previous year will accrue interest.
As mentioned above, if an instalment is late or deficient, consider paying the next instalment early, or overpaying it, to reduce the interest.
Since refund interest is taxable and underpayment interest is not deductible, an offset or contra is beneficial. Consider moving amounts between taxation years, to apply as or against instalments or moving an HST refund into the corporation’s income tax instalment account.
Did You Know
If tax is increased due to reduction in a foreign tax credit, no interest can be charged by CRA until 90 days after notice from that foreign country is received.
An example:
Bob files a US tax return for US business income. He reports and pays tax of $36,000 to the US. Later, the IRS determines he can claim a special deduction (section 199A) and his US tax drops to $28,000. He adjusts his Canadian tax return and pays $8,000 more to CRA. No interest can be charged on this until 90 days after receiving the IRS notice.
Other Issues
In a future Tax Tip, we will address interest rates and taxable benefits.
[1] The rate is adjusted quarterly.
[2] An election to pay the balance over 10 years may be available but interest is charged at the prescribed rate in effect at the time the election is made
[3] After any grind down for passive income over $50,000
[4] If the return is filed on time
