Understanding interest

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When we charge interests

We will charge interest if you make late or insufficient payments. This interest is called instalment interest or arrears interest, depending on the debt. We pay applicable refund interest up to the day an overpayment is refunded, repaid or applied.

The interest rate is determined every three months in accordance with the prescribed interest rate compounded daily.

The interest rate is based on the average rate of three-month treasury bills sold during the first month of the previous quarter.

Underpayments are rounded to the next higher whole percentage point and raised four percentage points. Overpayments are rounded to the next higher whole percentage point.

You can request an interest review or a Statement of Interest by using the "Enquiries service" and view a previously issued Statement of Interest Calculated using the "View mail" service at:

Instalment interest

We calculate instalment interest compounded daily, according to your instalment requirements for the year.

We use the offset method to calculate instalment interest. This means we give you credit when you prepay or overpay your instalments, and this can reduce or eliminate the interest we charge on late or insufficient payments.

We do not refund any excess of this credit. It is used only when calculating instalment interest charges. See an example of how we calculate instalment interest and penalty.

Note

Credit instalment interest is only calculated on instalment payments from the start of the tax year.

The interest rate on overpayments is lower than on underpayments; however, when we calculate instalment interest using the offset method, the interest rate is the same on prepayments and overpayments as it is on underpayments.

Arrears interest

We charge arrears interest according to the prescribed interest rate. Arrears interest is compounded daily on any unpaid balance from the balance-due day to the date of payment.

We charge arrears interest on the instalment penalty from the balance-due day to the date it is paid.

If you have an amount owing, you can view a revised balance that includes interest calculated to a date you select by using the "Account balance and activities" service and selecting the "Calculate future balance" option using:

Refund interest

We pay refund interest according to the prescribed interest rate. Refund interest is compounded daily on an overpayment up to and including the day the overpayment is refunded, repaid or applied.

When we refund or apply an overpayment, we pay refund interest from the later of the following dates:

  • the date of the overpayment;
  • the 120th day after the end of the tax year if the return for the year is filed on time; or
  • the 30th day after the date the return was filed if it is filed late.

In the case of a repayment of tax in controversy, special provisions apply.

Effect of a carryback on interest

You cannot use a carryback to reduce instalment interest.

We will not adjust instalment interest we previously charged if the amount of the current year credit (for example, dividend refund or capital gains refund) is adjusted because of the carryback.

We will calculate arrears interest, refund interest, or both, for the carryback from 30 days after the later of the following dates:

  • the first day following the tax year in which the carryback originates;
  • the date the tax return on which the carryback originates is filed;
  • the date a prescribed form, such as Schedule 4, or an amended return is filed; or
  • the date a request is made in writing to reassess a year to take into account a loss from another tax year.

Forgiven interest

If you pay an amount quoted on a notice of assessment or reassessment in full within 20 days of that notice, any additional interest from the notice date to the date of payment will not be charged.

Cancelling small amounts of penalty and interest

We will cancel any penalty or interest on an amount owed if the total amount of penalty and interest charged is $25 or less when the tax is paid in full. However, if a future adjustment is processed, this cancellation will be reversed and the account reviewed.

Cancelling or waiving penalties and interest

We may cancel or waive penalties or interest charges when you fail to pay an amount due to circumstances beyond your control. For additional information on such circumstances, see information circular IC07-1, Taxpayer Relief Provisions.

If you are in one of these situations, let us know about the problem and try to pay any amount owing as soon as possible. If you think there is a valid reason for cancelling or waiving penalty or interest charges, send us a letter explaining why you feel the penalty or interest charges should be cancelled or waived. Or, you can use form RC4288, Request for Taxpayer Relief, to make a request.

You may have paid an amount of interest or a penalty that is later cancelled after you make an application under the CRA's taxpayer relief provisions. We will calculate interest on this overpayment 30 days after your written request or Form RC4288 was received.

Pertinent loans or indebtedness

A pertinent loan or indebtedness (PLOI) refers to a debt for which an election has been filed under:

  • subsection 15(2.11) of the Income Tax Act regarding a loan received, or an indebtedness incurred, by a non-resident corporation that is owed to a corporation resident in Canada (CRIC) that is controlled by the debtor or by another non-resident corporation with which the debtor does not deal at arm's length; or
  • subsection 212.3(11) of the Act regarding an amount owing from a foreign affiliate of a CRIC that is controlled by a non-resident corporation and the amount is owed to the CRIC.

If a debt is a PLOI, it will be subject to the new deemed interest income rule under section 17.1 of the Act instead of potentially being treated as a deemed dividend.

Section 17.1 of the Act provides interest income deeming rules for the elective PLOI regimes for shareholder loans (subsection 15(2.11) of the Act) and the new foreign affiliate dumping rules (subsection 212.3(11) of the Act). Section 17.1 of the Act generally results in the CRIC having deemed interest income, in respect of a PLOI, at a rate at least equal to the prescribed rate.

There is no explicit line or box for this deemed interest income on the T2 Corporation Income Tax Return. Interest income determined under section 17.1 of the Act should be reported by the CRIC on Schedule 125, Income Statement Information, under field code 8230, "Other revenue".

Example

Corporation A, a non-resident corporation, controls Corporation B, a CRIC with a December 31 tax year-end. On January 1, 2016, Corporation A borrows $5,000,000 from Corporation B at 0% interest. By December 31, 2016, Corporation A has not repaid the loan. If Corporation A and Corporation B choose to elect under subsection 15(2.11) of the Act for the debt between them to be a PLOI, there is no Canadian withholding tax on a deemed dividend and, instead, Corporation B has deemed interest income starting January 1, 2016 at the regular prescribed rate (rounded to two decimal places instead of rounded up to the next whole number) plus four percentage points (4%).

These new elective rules generally apply to amounts that become owing after March 28, 2012 for both the shareholder loan and foreign affiliate dumping regimes and to amounts that became owing before March 29, 2012 for which the maturity date was extended after March 28, 2012 for the foreign affiliate dumping regime.

The non-resident corporation that controls the CRIC and the CRIC must jointly elect in writing to the Canada Revenue Agency for a debt to be a PLOI. File the election at the tax Centre of the CRIC on or before the filing-due date for the tax year in which the amount became owing (or the extension was made). If the election is filed late, a penalty of $100 for each complete month from the due date applies. The election must include the following:

  • the name and business number of the CRIC;
  • the name of the non-resident corporation that controls the CRIC;
  • the subsection of the Act that the election is filed under (for example 15(2.11) for shareholder loans or 212.3(11) for foreign affiliate dumping);
  • the name of the non-resident corporation debtor;
  • the amount of the PLOI; and
  • the date the PLOI became owing to the CRIC (or the extension was made).

Forms and publications

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