Evelyn Jacks & Walter Harder
Did you know that just under 200,000 people still owed money to CRA for the 2014 tax year going into the last holiday season? That’s less than 1% of all individual tax filers and they don’t owe that much: the median gap is $780 per individual. But owing CRA money can be very expensive. Here is how they are calculated and what you can do to speed up tax bill delinquency to start this year’s holiday season on sounder financial footing:
When you owe to CRA. When you owe money to the CRA on a balance due , you will be charged interest at the quarterly prescribed rate plus 4% more. Currently, that amounts to 5%, compounded daily. That is the equivalent of 5.18% annual interest and itstarts on the date that the debt was incurred. For many, it is less expensive to borrow from the bank than from the CRA. Check this out and make the comparisons; then pay off CRA first if you can.
When CRA owes you. When CRA owes you money, they’ll pay you interest at the prescribed rate rate of interest plus only 2% more, currently for a total of 3%. As you can see, this is is not as good as the rate the CRA reserves for itself. Worse, your interest payment only begins at the latest of:
In addition, any interest paid to you by the CRA is taxable and must be reported on your tax return for the year the interest is received.
When you owe quarterly instalment payments. In addition to interest on the balance owing when you file your return, you may be charged instalment interest if your instalments are late or too small. If you discover that your previous instalments for the year are insufficient, you can reduce your instalment interest by making larger instalments for the year, sooner, that is before the June 15, September 15 or December 15 deadline. Farmers and fishers have until December 31, by the way, to make a single instalment remittance for the year, based on 2/3 of their anticipated taxable income.
Once you’re notified of interest payable, no further interest will be charged if the total balance due is paid promptly – this generally means within 20 days of the notice.
Planning. The general rule for paying interest of any kind, is that you should whenever possible ensure the interest paid is tax-deductible, such as in the case of earning investment income. Interest paid to the CRA is never deductible and cannot be linked to an income-earning investment, so paying interest to the CRA is to be avoided whenever possible.
To ensure you don’t owe interest to the CRA, you should:
Also, as much as people love their tax refunds, try not to overpay your taxes at source. Some tips:
Additional educational resources: Want to learn more about what forms of interest are deductible? Take Tax Strategies for Investors and learn to be conversant in recent tax changes relating to a variety of investment opportunities. You'll also understand strategies and ordering rules using tax-free, tax-deferred, and taxable incomes. You'll use a series of assessment tools to structure your clients' pre- and post-tax investment income and to monitor ongoing results. You'll learn how to manage tax returns by being familiar with tax-free zones, clawback zones and marginal tax rates. You'll provide specific investment income planning approaches for a variety of taxpayer profiles, including young families, students, business owners, and retirees.