What are prescribed rates and how do they affect me?
Canada Revenue Agency (CRA) assigns “prescribed” interest rates every calendar quarter. These rates are used for interest charged on overdue taxes, interest paid to taxpayers and interest rate used to calculate taxable benefits loans and loans between related parties.
Rates have been very low for several years. 1% has been the rate. This has meant that we have not worried so much about owing CRA money and have not expected much interest income if they have our money. The real impact of the low rates has been in benefits loans and loans between related parties.
Imagine that you can borrow money from the bank at prime rate plus some percentage usually 3 or 4% or you can borrow from your own company at 1%. Which would you rather do? The loans from your own company do have strict rules which we cover in another FAQ. But when structured correctly this arrangement can save a business owner significant interest rate expense.
There is also a benefit in restructuring a business by buying and selling shares between family members. We know that we must make the sale at market prices but because of prescribed rates we don’t need to charge market interest rates we can use the lower rates allowed by CRA. So we can use 1% instead of 3 or 4%. This can save a family money.
Because prescribed rates can have a real impact on loans and transactions in a family business we like to pay attention to them. The rates are rumoured to be going up this next calendar quarter (October 1, 2013). So, if you have some loans planned they should be set up before the increase.
For more information on prescribed rates and loans to employees and shareholders, please contact us.Download a copy of this issue