In a significant shift that has caught many taxpayers off guard, the Canada Revenue Agency (CRA) is set to increase its penalty rate on overdue taxes to a staggering 10 percent in the first quarter of 2024. This marks a doubling of the rate that has been relatively stable at five or six percent for the past decade, causing a ripple effect across individuals and small business owners, already grappling with financial strains.
Until last year, the interest rate on unpaid taxes was deemed manageable, often not topping the list of financial priorities for many Canadians. However, starting in the second quarter of 2022, the interest rate began its upward trajectory, reaching nine percent, and is now slated to escalate further.
For taxpayers, this sharp increase means not only a more expensive process of repaying the CRA but also an added burden on their finances. The interest compounds daily, amplifying the financial stress already imposed by other penalties for late payments.
Tim Miron, founder of Pursuit CPA Professional Corp., notes the drastic shift in financial decision-making, stating, “Even when it was five percent, that was not fun. But sometimes that was a business decision for cash flow. Now, obviously that becomes a much more expensive decision.”
The impending increase has prompted tax advisers to reassess their strategies. Joseph Devaney from Video Tax News emphasizes the need for taxpayers to prioritize repaying overdue taxes earlier. According to Devaney, this significant hike has taken many by surprise, urging individuals to take the impending change seriously.
Sharon Perry, a small business accountant from Coquitlam, B.C., has adjusted her advice to clients, particularly emphasizing the importance of paying tax installments promptly. She suggests starting tax installments when requested by the CRA to avoid accruing interest, especially for those who are self-employed, have rental or investment income, collect certain pension payments, or have income from multiple sources.
Previously, advisers may not have pressed clients to prepay installments if they were uncertain about reaching the $3,000 threshold, as the interest charges for late payment were deemed "manageable." However, with the impending rate hike, interest has become a more significant concern.
Ms. Perry advises clients to consider paying installments diligently, even suggesting overpaying quarterly installments and paying early to earn some installment credit interest in return. This proactive approach can help offset any potential interest charges, providing taxpayers with a financial buffer.
As the CRA prepares to unveil the exact rate in the near future, taxpayers are urged to stay informed and take proactive measures to navigate the changing landscape of tax penalties. The looming 10 percent penalty rate serves as a stark reminder for individuals and businesses alike to reassess their financial strategies and prioritize timely tax payments to avoid the growing financial burden imposed by the CRA.
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