The start of 2024 has brought a significant shift in the Canada Revenue Agency’s (CRA) prescribed interest rates, now at a striking 10% for overdue taxes – a figure last seen more than two decades ago. As medical professionals, it’s crucial to understand how these changes can impact your financial strategies and tax planning. Let’s dive into the details and explore effective approaches to adapt to these new rates.
Understanding the Prescribed Rate Increase
The CRA’s prescribed interest rate is determined quarterly and is directly linked to the yield on Government of Canada three-month Treasury bills. For Q1 2024, we trace back to October 2023, averaging the three-month T-bill yields at 5.16%, leading to the current prescribed rate of 6%. This rate significantly influences various financial aspects, from taxable benefits to low-interest loans and related-party transactions.
Impact on Income-Splitting Loans
For high-earning medical professionals in Canada, income splitting with a lower-income spouse or family member has been a savvy tax reduction strategy. However, the CRA requires any income or capital gains from transferred or gifted money to be taxed back to the higher-income individual. The exception lies in loaning funds at the CRA’s prescribed rate, allowing investment returns above this rate to be taxed at the lower-income earner’s rate.
Back in 2020, when the rate hit a low of 1%, many took advantage of this strategy. Despite the current 6% rate, there are still opportunities for effective income splitting, especially when investing in avenues with higher yields.
For Those Expecting Tax Refunds
If you’re anticipating a tax refund, the good news is that the CRA will now pay an 8% interest rate on these refunds. However, this applies only to amounts owed after May 30, assuming you’ve filed by the April 30 deadline. Timely filing remains crucial to maximize this benefit.
Advice for Those Who Owe the CRA
With the interest rate on tax debts now at 10%, it’s more financially prudent than ever to settle any outstanding amounts with the CRA promptly. The non-deductibility of arrears interest and the high rate make it challenging to find comparable investment returns, emphasizing the importance of swift payment.
Moreover, it is financially prudent to plan your taxes in advance and make the appropriate installments to avoid paying interest as CRA also charges interest if you don’t make the expected installments on time. The other benefit of making regular installments is it greatly simplifies your cash flow as it links the income with all expenses, including tax.
MedTax.ca’s Role in Your Financial Strategy
At MedTax.ca, we specialize in providing tailored financial guidance to medical professionals in Canada. With these changes in the prescribed interest rates, our team is ready to assist you in adjusting your financial strategies to ensure you continue to thrive in your professional and personal financial journey.
Your Next Steps:
- Consult with MedTax Experts: Schedule a free consultation with us to evaluate your financial situation in light of these new rates.
- Customize Your Strategy: We’ll help tailor a financial plan that maximizes your benefits and minimizes tax liabilities.
Book your consultation with MedTax.ca here today and navigate these changes with confidence and expertise.
