DIY Prescribed Rate

The Income Tax Act in numerous places requires interest to be paid, either by the taxpayer or the Minister, on certain overdue amounts. The rate applicable is computed by reference to the “prescribed rate”. The Act also provides for calculating certain kinds of benefits by reference to that same rate. The rate fluctuates each calendar quarter. Usually, the CRA publishes the rate on its website well in advance of each quarter. For some reason, however, the CRA has still not published the rate for 2010 Q3. What is a poor tax adviser to do?

Remember that, in what follows, I am not your lawyer, and this blog does not provide legal advice.

If you are engaging in any kind of planning where the “prescribed rate” is crucial, you should get your own legal advice or perform your own calculation of the rate based on the provisions of the Income Tax Regulations.

The prescribed rate is determined in accordance with rules set out in Part XLIII of the Income Tax Regulations. The definition of the prescribed rate is found in section 4301. Subparagraph 4301(a)(i) of the Regulations defines a base rate, which is used to calculate the three types of rates used by the Act: the interest rate on amounts owed by a taxpayer, which is the base rate plus 4%; the interest rate on amounts owed by the Minister, which is the base rate plus 2%; and the rate for certain benefits that are taxed under the Act, which is the base rate.

The base rate is

the rate that is the simple arithmetic mean, expressed as a percentage per year and rounded to the next higher whole percentage where the mean is not a whole percentage, of all amounts each of which is the average equivalent yield, expressed as a percentage per year, of Government of Canada Treasury Bills that mature approximately three months after their date of issue and that are sold at auctions of Government of Canada Treasury Bills during the first month of the quarter preceding the particular quarter

As is mentioned above, the rate for 2010 Q3 has not yet been posted on the CRA website. I called the CRA this morning, and the agent to whom I spoke was also unable to provide the rate (she said her system “was not updated”).

The Department of Finance website, however, confirms that the rate will be 1% in 2010 Q3. The Finance website states that the 3-month T-bill average yield for April (the first month of 2010 Q2) was between 0.3% and 0.4%. The Bank of Canada website confirms this data. It would appear then that, based on this data and the definition of “prescribed rate” in subparagraph 4301(a)(i) of the Regulations, the prescribed rate for 2010 Q3 will not exceed 1% because the relevant T-bill rate did not exceed 0.5% in April, 2010. The prescribed rate for 2010 Q3, then, should be 1%.

2 thoughts on “DIY Prescribed Rate

  1. Perhaps part of the reason for the delay was that the CRA was unsure whether to post the new, fourth category of interest rate, which is the rate for corporations that overpay taxes. The interest rate historically for overpayments was the prescribed rate plus 2%. Apparently some corporations were deliberately overpaying taxes to obtain this rate (presumably their banks weren’t offering such good rates). The 2010 budget, which was just passed, amended the Regulations to specify that corporations would be entitled to the prescribed rate only. All other taxpayers will still be entitled to a rate equal to the prescribed rate plus 2%.

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