Businesses often find it difficult to calculate their taxes in advance. This difficulty can lead to an outstanding balance on Canadian taxes when the organization’s tax return is filed. Many businesses with a balance owing may need to make instalment payments, which can sometimes result in being charged interest. When does the Canada Revenue Agency (CRA) charge interest on outstanding balances? How is the interest calculated? Is there any way to avoid the interest? If you have other questions regarding an outstanding tax balance, or other questions relating to Canadian tax requirements for businesses, a tax attorney with Jeremy Scott Law may be able to help. Schedule an appointment today by calling (902) 403-7201.
When Does CRA Charge Interest on Outstanding Balances on Canadian Taxes?
The CRA may charge interest on outstanding balances on Canadian taxes if the business makes insufficient or late payments. Depending on the type of debt the taxpayer is paying, this is called arrears interest or instalment interest. The calculation methods for the application of interest are different based on whether the interest is instalment or arrears. The CRA also pays refund interest up to the day an overpayment is applied, refunded, or repaid.
How Is Interest Calculated on Balances Owing?
The interest rate is recalculated every three months based on the prescribed interest rate at that time. The CRA uses the average rate of a three-month treasury bond sold during the previous quarter’s first month to determine the interest rate. From that starting point, the interest is compounded daily. Underpayment rates are rounded to the next whole percentage point and an additional four percentage points are added. Overpayment rates are rounded to the next whole percentage point.
Instalment Calculations
Instalment interest is calculated using the offset method. This method gives the taxpayer credit when they prepay or overpay their instalments. Offset can reduce or eliminate the interest charged on late or insufficient payments. Taxpayers should note, however, that a carryback does not reduce instalment interest.
Arrears Calculations
The application of interest for arrears on outstanding balances on Canadian taxes is charged based on the prescribed interest rate. This interest on any balance that is unpaid from the date the balance is due to the date the balance is paid is compounded daily.
Taxpayers can sign in to their business account on Canada.ca, go to “View and Pay Account Balance,” then choose the “Calculate Future Balance” option to select different dates and see revised balances showing the interest that would be paid based on the date the balance is paid. Using this tool can make it easier for taxpayers to determine when, whether, and how to take advantage of offset calculations.
Refund Calculations
Refund interest is also based on the prescribed interest rate. Refund interest is compounded each day, including the day it is applied, repaid, or refunded. Interest charges begin on the later of:
- The date of the overpayment
- 120th day after the end of the tax year if the return is filed on time
- 30th day after the date the return is filed if it is filed late
Can Interest Be Forgiven, Canceled, or Waived?
There are some circumstances under which the CRA will forgive, cancel, or waive penalties or interest on outstanding balances on Canadian taxes.
Tax Balance Paid in Full
When the taxpayer receives an assessment or reassessment notice, the notice includes the amount of taxes owed. If the taxpayer pays the entire quoted amount on the notice in full by the date specified on the notice, the CRA will not charge any additional interest from the notice date to the payment date.
Penalty or Interest Amount Less than $25
If the total amount that the taxpayer owes in penalties and interest is $25 or less, the CRA will cancel the full amount of the penalties and interest when the outstanding tax balance is paid in full. Taxpayers should note that if the CRA processes a future adjustment, the cancellation will be reversed, and their account will be reviewed.
CRA Taxpayer Relief
The CRA has taxpayer relief provisions that give them some discretion in canceling or waiving penalties or interest when the taxpayer cannot meet their tax obligations through no fault of their own. This relief is limited to any period ending within the 10 calendar years before the year the request is made. If you are considering requesting taxpayer relief, Jeremy Scott Law may be able to assist you.
How Can I Request Taxpayer Relief?
Businesses that want to request taxpayer relief may fill out Form RC4288 – Cancel or Waive Penalties or Interest, which can be found on Canada.ca Forms and Publications. Taxpayers must be able to show that they cannot pay the penalties or interest due to circumstances beyond their control, CRA actions, or financial hardship. They will also need to include several key pieces of information.
Circumstances Beyond Your Control
For a taxpayer to claim circumstances beyond their control as a reason they cannot pay outstanding balances on Canadian taxes, the situation must be one they could not have foreseen or prevented. Examples include but are not limited to:
- Fire
- Flood
- Serious illness or accident
- Postal strike or other civil disturbance
- Serious emotional or mental distress such as a death in the immediate family
CRA Actions
If the CRA’s actions are the primary cause for penalties or interest, they may cancel or waive the penalties or interest. CRA actions that could be cause for canceled or waived penalties or interest include but are not limited to:
- A processing delay that left the taxpayer unaware they owed a balance
- Incorrect information provided by the CRA to the taxpayer or in CRA materials that resulted in the taxpayer making an error
- Processing errors
- Delays in providing information the taxpayer would need to meet their obligations on time
Financial Hardship or Inability To Pay
In some cases, if the CRA can confirm the taxpayer’s inability to pay, they may cancel or waive penalties or interest. Examples of circumstances that would be considered financial hardship or inability to pay include:
- A loss of employment
- Evidence that paying the accumulated interest would result in the taxpayer being unable to provide basic necessities for a prolonged period
- The taxpayer being unable to finish the payment arrangement because the interest is a significant portion of the payment amounts
Information Required
When filing Form RC4288 to request interest on outstanding balances on Canadian taxes be canceled or waived, taxpayers must provide all the relevant information per the Canada Revenue Agency’s requirements, including but not limited to:
- Name, address, and phone number
- Business number (or other identification number assigned by the CRA)
- Tax year(s) involved
- Facts, accompanied by explanations, to support the claim that the interest or penalty were primarily caused by circumstances beyond the taxpayer’s control, CRA actions, or financial hardship
- Any relevant documents, such as death certificates, doctor’s statements, or insurance statements
- Complete history of any actions already taken to attempt compliance, such as payments or payment arrangements made
- Full financial disclosures of income, expenses, liabilities, and assets (in cases of financial hardship)
Do You Need Help With Outstanding Balances on Canadian Taxes?
The application of interest to outstanding balances on Canadian taxes can be confusing and can also make paying off the outstanding balance take longer and cost more than a balance with no interest charged. Fortunately, it is sometimes possible to reduce or eliminate the interest so the outstanding balance is more manageable. If you need help understanding interest, calculating the interest, or requesting relief from interest on an outstanding balance, Jeremy Scott Law may be able to assist you. Schedule an appointment by calling (902) 403-7201 today.