Tax debts will soon become more expensive

1^er In July, the “prescribed rates” will be increased. As a result, it will cost more than all our outstanding government bills.

Among others …

What are the rates actually prescribed? How do they affect us?

A range of rising rates

Each quarter, the Canada Revenue Agency (CRA) reviews a range of rates applicable to all types of debt and transactions, including personal debts as well as amounts payable to taxpayers.

I say “edit”, but in reality, it depends. CRA is based on the benchmark specified rate on the average 90-day Treasury bill rate in the first month of the previous quarter, and then reaches the next high percentage point.

In April, 90-day treasury bills crossed the 1% mark (to be precise, 1.2%). So this Friday’s forecast rate will go up from 1% to 2%.

This should come as no surprise to anyone looking at the evolution of Canada’s debt securities.

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

When the reference rate increases, it drives all other indicated rates. For example, interest on federal tax arrears is 4% plus the benchmark rate. Therefore, the interest on tax loans will increase from 5% to 6%. In the case of government debt, the rate will increase from 3% to 4%.

Significant impact on revenue segmentation

Tax professionals and accountants are monitoring the evolution of the prescribed rate because it affects their clients who use spouse income separation strategies. The goal is to reduce the tax bill for a couple.

For such a strategy to be effective, a significant income gap must separate spouses. Either lends less after taxing more, so it invests this money. The tax bite on investment profits is in the hands of the spouse who enjoys a lower tax rate. For this strategy to work, the originator of the loan must report interest income at the prescribed rate (2%).

“Interest must be paid and the spouse who pays it can deduct these costs from the proceeds from the investment,” explained CPA Eric Brazue. For many years, he said, tax savings would be substantial.

Failure to comply with this rule will result in a return tax levied on the lender, making the operation useless.

When the prescribed rate is increased, it does not affect existing loans, but does not affect new loans. The income split between spouses then becomes a little less effective.

It is accepted that financial news is fraught with more serious issues.

The method of determining the interest rate applicable to loans to Revenu Québec (RQ) is different from that of CRA.

“The interest rate is determined by the average of the base rates of bank loans granted to businesses. These rates are published by the Bank of Canada on the last Wednesday of the second month of each quarter and take effect from the next quarter. The result is rounded to the nearest integer and half rounded to the lesser whole number. In addition, it has increased by 3%, ”explains the RQ site.

Rates are often the same, but sometimes the regional tax rate is higher. Currently, they are identical.