Have you heard the latest news from the Canada Revenue Agency (CRA)? In 2024, it’s planning to bump up an already climbing interest rate on overdue taxes to 10%. This is a huge leap from previous years, and it’s shaking up things for everyone—businesses, individuals, and even tax pros. 

What does this mean and how could this change impact your tax planning? Keep reading to find out how you can mitigate the interest rate hike with savvy tax strategies and by taking advantage of online services like CRA’s My Payment.

Key Takeaways
  1. The CRA’s new 10% rate on overdue taxes expected in 2024 could call for changes to financial strategies for individuals and businesses. 
  2. Early and regular tax instalments are key to dodging late payment fees. 
  3. Leverage tax software and professional guidance to navigate the increased rate effectively.

Understanding the federal interest rate hike

Since 2007, the CRA’s interest rates on unpaid taxes have been relatively stable, hovering between 5% and 6%. However, in 2022, the CRA began to parallel global economic shifts and react to broader trends like the federal (fed) rate hike. Thus, the CRA interest rate began a steep incline and is currently at 9%. 

The interest rate moving up a notch to 10% in the first quarter of 2024 is an escalation that not only reflects the current economic climate, but also could signify a new era in tax management.

Impact of a 10% CRA rate on taxpayers

Jumping to a 10% interest rate could have big financial implications for both individual taxpayers and small business owners. The increase also provides an opportunity to take a fresh look at financial strategies in light of this change.

For small businesses already navigating a complex financial landscape, this hike could mean reassessing cash flows and budget plans. In the past when the rate was 5%—just half of what it will be in 2024—small businesses and taxpayers may have contemplated late payments in favour of making loan payments where the interest charged was much more than 5%. 

With an increase to a CRA rate of 10%, it makes more sense for taxpayers to consider paying their taxes on time. Strategic tax planning can help lessen the burden.

For instance, if a taxpayer owes $10,000 in taxes and misses the deadline, at a 10% CRA rate, they would incur an additional $1,000 in interest over a year. However, by paying on time, they avoid this extra cost, keeping their financial obligations more manageable.

Additionally, it’s important to remember that the 10% CRA rate isn’t the only cost of late payments. The CRA also imposes late-filing penalties. If you miss the tax-filing deadline, you’re charged a penalty of 5% of your owed taxes, plus 1% of your balance owing for each full month your return is late, up to a maximum of 12 months. 

This means delaying your tax filing could lead to additional fees on top of the increased interest rates, making timely tax filing and payment even more critical.

Strategic tax planning to avoid higher CRA rates

In response to the CRA’s rate hike, tax strategies are rapidly evolving. Expect experts to adjust their guidance to reflect these changes. Timely tax payments may be prioritized over other strategies to help taxpayers adjust to the potential rate increase. 

For example, taxpayers may want to adjust their budgets to allocate more funds toward tax payments throughout the year, reducing their end-of-year tax burden.

For businesses, the strategy could involve more frequent financial reviews to ensure companies are setting aside enough for tax obligations, given the increased rates. Leveraging business expenses and investments that offer tax advantages may reduce taxable income and, consequently, taxes owed.

Both individual taxpayers and small businesses could shift their focus to these types of proactive strategies to deal with the new rate going forward. 

Adapting to the new rate

With a bit of care and attention, prioritizing tax payments can become second nature. The key to navigating the new CRA interest rate is making tax instalments when necessary. Instalments are periodic tax payments required when a taxpayer’s net tax owing goes above a certain threshold. For instance, that number’s $3,000 for 2023 ($1,800 for Quebec). These periodic CRA payments can significantly reduce the burden of a lump-sum amount at the end of the year, especially with the looming interest rate hike.

When it comes to instalments, it’s typically folks like self-employed individuals, those with rental or investment income, and even people juggling more than one job who are required to pay them. It’s a way to spread out their tax payments over the year, making it easier to handle come tax time. Think of it as a helpful tool for anyone who doesn’t have taxes automatically deducted from their paycheques—it keeps them on track and avoids any surprises with the taxman!

The kicker with instalments though, is if you miss a payment or pay late, you’ll be charged interest retroactively to the date the payment was due. Current instalment due dates for individuals and small business that aren’t incorporated are:

  • March 15
  • June 15
  • September 15
  • December 15

The higher the CRA rate climbs, the more you’ll feel the pinch of a large, end-of-year tax bill. By opting for instalment payments, you’re essentially spreading out the cost and reducing the risk of being hit with a big, unexpected expense.

Practical steps to save on high tax bills

To avoid the sting of high-interest fees, consider taking action like making regular payments to manage your tax liabilities more effectively, utilizing the CRA’s My Payment service—and staying ahead of the curve by making early and additional instalment payments if necessary. These strategies collectively could help lower your total interest burden or eliminate it altogether.

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