Prescribed Interest Rate on Monies Owing to the Tax Man
Adam Aptowitzer, March 08, 2006
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| On March 3 the Canada Revenue Agency announced that the prescribed interest rates for amounts owing to the CRA in respect of income tax and penalties would rise to 8%, its highest rate since the third quarter of 2003. Interest is charged on amounts owing to the CRA on a rate compounded daily but set quarterly. While most people simply ignore the prescribed interest rate announcements as being irrelevant for their day to day life, even a 1% increase in the prescribed rate for a quarter can have an on an amount owing. For example, Chart 1 below illustrates the approximate effect of raising the interest rate from 7% to 8% in this quarter for a $10,000 tax debt and $5,000 penalty owing from the 2000 taxation year. However, as interest is compounded daily, even a small difference in this quarter could become a large difference in a later year. Chart 2 illustrates what the approximate interest owing in the second quarter of 2006 would be if, all other things being equal, the prescribed interest rate in the first quarter of 2001 had been 9% instead of 10%. |
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| Chart 1 Effect of Raise in Current Interest Rate |
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| Chart 2 Effect of Raise in Interest Rate in Q2 2001 |
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| For those who appeal income tax assessments, except in unusual circumstances, CRA cannot take collection action while the matter is under appeal. However, the interest clock continues to run. Of course if a taxpayer is successful in reducing his or her tax assessment, the interest will be reduced accordingly. |
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| The hike in the prescribed rate should serve as a reminder for individuals of the usefulness of the Voluntary Disclosure Program. Under this Program, designed to allow and encourage taxpayers to become compliant in their income tax filings, a valid Voluntary Disclosure will ensure that no prosecution will arise and no penalties will be applied in respect of past sins. |
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| Under the Income Tax Act the Minister has the power to waive or cancel interest payable on income tax owing. Although the Voluntary Disclosure Program guarantees a waiver of penalties, there is no such guarantee of a waiver of interest. However, in the context of a voluntary disclosure, we have had success in negotiating a reduction in the tax rate to be applied to the taxes owing. Thus, instead of charging 7% in a quarter CRA may agree to charge 4%. Given that the interest is compounded daily this is not a small amount. Chart 3 indicates the impact of making a voluntary disclosure of tax owing from 2003 taxation year and the effect of reducing the interest payable in each quarter by 3%. |
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| Chart 3 Effect of Reducing the Interest Rate Under the Voluntary Disclosure Program |
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| Even without accounting for the effect of eliminating penalties and interest on penalties which would otherwise be payable if the voluntary disclosure had not been made, the effectiveness of the voluntary disclosure program is self-evident. Our firm has a great deal of experience in making voluntary disclosures and can help protect the solicitor - client privilege surrounding these disclosures. For more information or to retain us in making a voluntary disclosure please contact us at 613.237.3300. |
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