Prescribed Interest Rates
Under the Income Tax Act, the measurement of the amount of many types of taxable benefits depends upon the application of a “prescribed rate of interest” to the amount in question.
Many years ago, Parliament determined that this prescribed rate should change quarterly, in response to changes in the interest rates paid by the Federal Government on the treasury bills that it issues.
The current rates (applicable, for instance, to non-arm’s length loans) is now 3% (for the last quarter of 2005), which is at or near the all-time record low. While it cannot be determined with certainty, it appears that the rate for the next quarter may go up, particularly in view of the inflationary impact of recent oil price increases and other factors.
The prescribed interest rates for the first quarter of 2006 are as follows:
- 3% to calculate a deemed interest taxable benefit on subsidized employee and shareholder loans;
- 5% on refund of income tax overpayments; and
- 7% on payments of overdue income taxes, insufficient income tax instalments, unremitted employee source deductions, CPP contributions or EI premiums, and unpaid penalties.
These rates remain unchanged from the 4th quarter of 2005 and will be in effect from January 1st, 2006 to March 31st, 2006.
This suggests that tax planners and their clients contemplating some loans to low-income family members might do well to consider formalization of such loans before March 31st, 2006 to lock in the low 3 percent rate.