The Department of Finance confirmed that the prescribed interest rate will be 8% in the first quarter of 2023. The rate increase will impact those who owe money to the Canada Revenue Agency (CRA) and those contemplating a prescribed-rate loan strategy, as well as intergenerational transfers and corporate freezes.
Crowe MacKay's trusted advisors share how the increase may impact you and provide some tax planning solutions. If you require assistance, connect with us in Alberta, British Columbia,
What is the Prescribed Rate?
Outstanding Balance with the CRA
If you have money owing to the CRA, you may want to reduce or eliminate your balance as soon as possible.
Several types of payments made to the CRA during the year, or at year-end, be it GST/HST remittances, tax instalments, or on income tax that is already due will be impacted by a rate of 7%. Therefore, missing a payment deadline or making an insufficient instalment(s) will be an expensive mistake.
Here are the income tax interest rates:
- Interest on over-due taxes will be 8%
- Interest to be paid on corporate taxpayer overpayments will be 4%
- Interest to be paid on non-corporate taxpayer overpayments will be 6%
- Interest for employee taxable benefits and interest-free or low-rate loans will be 4%
Tax Planning Strategies
Prescribed Rate Loans
Want to split your income to save on your taxes?
A common way families can reduce their taxes is by creating a prescribed rate loan (PRL) for a family member, such as a common-law partner or family trust. Generally, a PRL makes sense for high-tax bracket individuals with funds for passive investments and are considering transferring part of that passive income and the tax burden to a related party. Once these loans are created they are then charged interest at the prescribed rate in effect when the loan is made.
Note that existing prescribed rate loans should not be affected by future rate increases.
Intergenerational Transfers and Corporate Freezes
A "corporate freeze" can help to transfer the future wealth of a business to the next generation by introducing family members as shareholders. However, this type of transaction runs the risk of "corporate attribution" if certain requirements are not met, possibly resulting in a deemed income inclusion to the "freezing" shareholder. One way to mitigate this risk is to have the company pay a dividend to the "freezing" shareholder based on the prescribed interest rate. With increases in the prescribed interest rates, larger dividends may need to address the corporate attribution issue. Please consult your trusted Crowe MacKay advisor to set up an appropriate structure that is appropriate for you and your family.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.