Understanding interest

When we charge interest

We will charge interest if you make late or insufficient payments. This interest is called instalment interest or arrears interest, depending on the debt. We pay applicable refund interest up to the day an overpayment is refunded, repaid, or applied.

The interest rate is determined every three months in accordance with the prescribed interest rate compounded daily.

The interest rate is based on the average rate of three-month treasury bills sold during the first month of the previous quarter.

Underpayment rates are rounded to the next higher whole percentage point and raised four percentage points. Overpayment rates are rounded to the next higher whole percentage point.

You can request an interest review or a Statement of Interest by using the "Enquiries service" and view a previously issued Statement of Interest Calculated using the "View mail" service at:

Instalment interest

We calculate instalment interest compounded daily, according to your instalment requirements for the year.

We use the offset method to calculate instalment interest. This means we give you credit when you prepay or overpay your instalments, and this can reduce or eliminate the interest we charge on late or insufficient payments.

We do not refund any instalment interest calculated using the offset method. It is used only when calculating instalment interest charges. See an example of how we calculate instalment interest and penalty.

Note

Credit instalment interest is only calculated on instalment payments from the start of the tax year.

The interest rate on overpayments is lower than on underpayments; however, when we calculate instalment interest using the offset method, the interest rate is the same on prepayments and overpayments as it is on underpayments.

Arrears interest

We charge arrears interest according to the prescribed interest rate. Arrears interest is compounded daily on any unpaid balance from the balance-due day to the date of payment.

We charge arrears interest on the instalment penalty from the balance-due day to the date it is paid.

If you have an amount owing, you can view a revised balance that includes interest calculated to a date you select by using the "View and pay account balance" service and selecting the "Calculate future balance" option using:

Refund interest

We pay refund interest according to the prescribed interest rate. Refund interest is compounded daily on an overpayment up to and including the day the overpayment is refunded, repaid, or applied.

When we refund or apply an overpayment, we pay refund interest from the later of the following dates:

  • the date of the overpayment
  • the 120th day after the end of the tax year if the return for the year is filed on time
  • the 30th day after the date the return was filed if it is filed late

In the case of a repayment of tax in controversy, special provisions apply.

Effect of a carryback on interest

You cannot use a carryback to reduce instalment interest.

We will not adjust instalment interest we previously charged if the amount of the current year credit (for example, dividend refund or capital gains refund) is adjusted because of the carryback.

We will calculate arrears interest, refund interest, or both, for the carryback from 30 days after the later of the following dates:

  • the first day following the tax year in which the carryback originates
  • the date the tax return on which the carryback originates is filed
  • the date a prescribed form, such as Schedule 4, or an amended return is filed
  • the date a request is made in writing to reassess a year to take into account a loss from another tax year

Forgiven interest

If you pay an amount quoted on a notice of assessment or reassessment in full by the date specified, any additional interest from the notice date to the date of payment will not be charged.

Cancel small amounts of penalty and interest

We will cancel any penalty or interest on an amount owed if the total amount of penalty and interest charged is $25 or less when the tax is paid in full. However, if a future adjustment is processed, this cancellation will be reversed and the account reviewed.

Cancel or waive penalties or interest

The Canada Revenue Agency (CRA) administers legislation, commonly called taxpayer relief provisions, that gives the CRA discretion to cancel or waive penalties or interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control.

The CRA's discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made.

For penalties, the CRA will consider your request only if it relates to a tax year or fiscal period ending in any of the 10 calendar years before the year in which you make your request. For example, your request made in 2022 must relate to a penalty for a tax year or fiscal period ending in 2012 or later.

For interest on a balance owing for any tax year or fiscal period, the CRA will consider only the amounts that accrued during the 10 calendar years before the year in which you make your request. For example, your request made in 2022 must relate to interest that accrued in 2012 or later.

To make a request, fill out Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. For more information about relief from penalties or interest and how to submit your request, go to Taxpayer relief provisions.

Pertinent loans or indebtedness (PLOI)

The Income Tax Act (the Act) contains a number of rules in relation to loans or indebtedness which can apply in the context of cross-border transactions. This guidance deals with pertinent loan or indebtedness (PLOI) elections, which are relevant for the purposes of sections 15 and 212.3 of the Act. The following guidance is not a substitute for the law. The reader should consider this guidance in light of the relevant provisions of the law in force for the particular tax year being considered.

Context

Subsection 15(2) may apply when a corporation resident in Canada (CRIC) or a qualifying Canadian partnership [(QCP) is a partnership all members of which are either the CRIC or another CRIC that is related to the CRIC] makes a loan to, or is otherwise owed an amount by certain persons or partnerships. Where subsection 15(2) applies to an amount owing by a non-resident, the amount is deemed to have been paid as a dividend from a CRIC and will be subject to non-resident withholding tax.

Section 212.3 contains rules (known as the foreign affiliate dumping rules) that, among other effects, may deem certain amounts that become owing by a foreign affiliate of a CRIC to be a dividend paid by the CRIC to its non-resident parent and subject to non-resident withholding tax.

Pertinent loan or indebtedness election

The election to treat an amount owing that would be subject to subsection 15(2) or 212.3(2) as a PLOI allows taxpayers to avoid deemed dividend treatment and any withholding tax liability that would otherwise result, and instead to have the amount owing subject to the PLOI interest imputation rules discussed below.

These elective rules generally apply to amounts that become owing after March 28, 2012.

The effect of a PLOI election

PLOI election filed under subsection 15(2.11) or 212.3(11) in respect of an amount owing to a CRIC

Where an election is made under either subsection 15(2.11) or 212.3(11) in respect of an amount owing, it will be a PLOI and thus become subject to the deemed interest income rule under section 17.1, instead of being subject to potential deemed dividend treatment.

The deemed interest income is computed as follows:

A - B

where:

A is the greater of:

  1. the amount of interest that would be included in computing the income of the CRIC for the year in respect of the PLOI if that interest were computed at the prescribed rate
  2. where the PLOI is funded directly or indirectly by another loan or indebtedness owed by the CRIC or certain non-arm's length persons or partnerships, the amount of interest payable on that loan or indebtedness for the year of the CRIC during which the amount owing was a PLOI.

B is the actual amount of interest included in the income of the CRIC for the year in respect of the PLOI.

The applicable prescribed interest rates are published by the CRA for each quarter.

PLOI election filed under subsection 15(2.11) in respect of an amount owing to QCP

Where the PLOI election is filed in respect of an amount owing to a QCP under subsection 15(2.11), the section 17.1 deemed interest computation formula discussed in PLOI election filed under subsection 15(2.11) or 212.3(11) in respect of an amount owing to a CRIC will also apply. However, in that case, the relevant computation period will be the fiscal period of the partnership. As defined in subsection 15(2.14), a QCP generally means a partnership each member of which is the CRIC or another corporation resident in Canada to which the CRIC is related.

PLOI election filed under subsection 212.3(11) in respect of an amount owed to or by a partnership

Subsection 212.3(25) contains "look-through" rules for partnerships for the purposes of the foreign affiliate dumping rules. These rules may be relevant for the purposes of a PLOI election made under subsection 212.3(11).

In general, subsection 212.3(25) deems amounts owed to or by a partnership to be owed to or by each member of the partnership, based on the proportionate fair market value of the respective member's interest in the partnership. This will result in deemed amounts owing to a CRIC.

These deemed amounts are subject to the foreign affiliate dumping rules and a PLOI election could be made in relation to them. The deemed interest computation rules discussed in PLOI election filed under subsection 15(2.11) or 212.3(11) in respect of an amount owing to a CRIC will be relevant where a PLOI election is made.

Relevant period of computation

The deemed interest income under amount A of the formula should be computed from the first day that the PLOI amount became outstanding and include each day the amount remains outstanding.

Reporting PLOI interest income

Amounts to be reported

The amount that needs to be reported in respect of the PLOI interest income is the imputed PLOI income inclusion under section 17.1, which represents the deemed interest amount (amount A) reduced by the amount of actual interest (amount B) as discussed in PLOI election filed under subsection 15(2.11) or 212.3(11) in respect of an amount owing to a CRIC. Report this net result of the formula "A minus B" on Schedule 1, Net Income (Loss) for Income Tax Purposes, on line 210, "Deemed interest on loans to non-residents".

Report the amount of actual interest income (amount B), if applicable, on Schedule 125, Income Statement Information, under item 8091, "Interest from foreign sources" (or item 8090 "Investment Revenue" if using Form T1178, General Index of Financial Information – Short).

Example

Corporation A, a non-resident corporation, controls Corporation B, a CRIC with a December 31 tax year-end. On March 1, 2021, Corporation A borrows $5,000,000 from Corporation B at an interest rate of 3% (which rate is established by the CRA to be an arm's length rate throughout the relevant time, based on the terms and conditions of the loan). By December 31, 2022, Corporation A has not repaid the loan. Corporation A and Corporation B choose to elect under subsection 15(2.11) of the Act for the debt between them to be a PLOI and file the election on June 30, 2023, Corporation B's 2022 filing-due date. There is no resulting deemed dividend and, instead, Corporation B has to include deemed interest income on $5,000,000 for its 2021 (March 1 – December 31) and 2022 (entire year) tax years, and will have to continue to do so for any subsequent year until the PLOI is fully repaid. As the election was not filed at the time of Corporation B's 2021 filing-due date, a late-filing penalty would be applicable. As the loan was interest bearing, the CRIC would report the PLOI "A minus B" deemed interest inclusion discussed above on Schedule 1, on line 210, "Deemed interest on loans to non-residents", and the amount of actual interest income (amount B) on Schedule 125, under item 8091, "Interest from foreign sources" (or item 8090 "Investment Revenue" if using Form T1178, General Index of Financial Information – Short).

Filing requirements

Change in administrative policy

In interpreting the term "amount" in relation to a loan or an indebtedness, and consistent with the CRA's historic view, each increase in the loan or indebtedness balance should be treated as a unique amount of indebtedness. As a result, the CRA's policy on PLOI elections was that, if the filing-due date was the same for electing PLOI treatment for more than one amount owing, a single written communication could be prepared and filed with the Minister which contained an election for each particular amount owing.

As of March 25, 2022, the CRA has adopted an administrative policy that requires only one election to be made in respect of each loan or indebtedness governed by the same agreement owing by each non-resident person. For example, a revolving loan will require one single election even if there have been or will be multiple amounts borrowed and repaid under the same loan or indebtedness instrument. In these circumstances, the loan or indebtedness will be considered to arise on the date of the first amount owing under the agreement.

This administrative policy will apply to all elections filed after April 11, 2022. In order to be eligible for this administrative policy, taxpayers will need to send to the CRA, along with the PLOI election containing the information described in Information to be provided in respect of the PLOI election, a copy of the agreement in respect of which the single PLOI is being filed for the multiple amounts owing under that legal instrument.

This administrative policy does not modify the manner in which the imputed interest income in respect of a PLOI election must be computed.

As a reminder of your legal obligations to keep appropriate books and records for tax purposes, for each subsequent year after the initial year for which the single PLOI election is filed and for which the legal instrument remains in place, you must keep all information and documentation supporting the PLOI deemed interest income inclusion, including detailed information on the multiple amounts which were relevant for the PLOI income inclusion for that subsequent year, in case the CRA asks to see them.

Filing requirements for 15(2.11) PLOI elections

The CRIC and the non-resident corporation that controls it must jointly elect in writing with the CRA for an amount owed to a CRIC to be a PLOI. The election must be filed by the CRIC and a non-resident corporation that controls it even if the amount is owed to the CRIC by another related non-resident corporation.

The election must be filed at the tax centre of the CRIC on or before its filing-due date for the tax year in which the amount became owing.

For an amount owed to a QCP, the election is required to be filed jointly by all the members of the QCP and the non-resident corporation that controls the CRIC on or before the CRIC's filing-due date for its tax year in which the partnership's fiscal period which includes the time the amount became owing ends. Where more than one foreign controlled CRIC is a member of the QCP, each member will be viewed as "the CRIC" for purpose of the PLOI election. In such a case, however, the CRA will accept that the taxpayers choose which member of the QCP will be "the CRIC" for purposes of filing the PLOI election. The joint election must be filed at the tax centre of the QCP on or before the latest of the filing-due dates of all of the foreign controlled CRICs that are members of the QCP.

Filing requirements for subsection 212.3(11) PLOI elections

A PLOI election under subsection 212.3(11) must be filed jointly by the CRIC and the non-resident person that controls the CRIC on or before the CRIC's filing-due date for its tax year in which the amount became owing.

For transactions occurring after March 18, 2019, if there is a group of non-arm's length non-residents (referred to as "parent") that controls the CRIC, each parent must jointly elect with the CRIC on or before the CRIC's filing-due date for its tax year in which the amount became owing.

The PLOI election under subsection 212.3(11) must be filed at the tax centre of the CRIC.

Information to be provided in respect of the PLOI election

Currently there is no prescribed form to file a PLOI election. The PLOI election should be made by submitting a letter to the CRA. For elections made after April 11, 2022, the letter should include the following information:

  • the name and business number of the CRIC (or QCP)
  • the name of the non-resident corporation that controls the CRIC for a subsection 15(2.11) PLOI election, or the name of each non-resident parent that jointly controls the CRIC for a subsection 212.3(11) PLOI election
  • the subsection of the Act that the election is being filed under (15(2.11) or 212.3(11))
  • the name of the non-resident corporation or non-resident partnership debtor 
  • the first tax year in respect of which this PLOI election is made (i.e. tax year in which the loan or indebtedness arose)
  • the currency in which the loan or indebtedness for which the PLOI election is filed is denominated
  • the total amount for which the PLOI election is filed at the time the loan or indebtedness arose expressed in CAD or the taxpayer’s elected functional currency, as determined based on the relevant spot rate at that time
  • the total changes in the amount for which the PLOI election is filed on a monthly basis showing increases and decreases from the date the loan or indebtedness arose
  • the monthly total of deemed interest on the amount for which the PLOI election is filed, the monthly total of actual interest charged by the CRIC on the loan or indebtedness and the adjustment to interest income required (if any)
  • where the amount for which the PLOI election is filed is funded directly or indirectly by another interest-bearing loan or indebtedness, the interest rate and amount of interest payable on that loan for the year
  • for revolving loans or other legal instruments where multiple amounts become owing, include a copy of the loan agreement detailing the terms and conditions of the loan or indebtedness

In order to facilitate a timely processing of their election, taxpayers are encouraged to provide the required information in respect of the PLOI using the following format/table:

Suggested PLOI election table
Activity by month from the time the PLOI arose
(in Canadian dollars or taxpayer’s elected functional currency)
Balance of PLOI at the beginning of the month Total increases in the month including capitalized interest (do not net from decreases) Total decreases during the month (do not net from increases) Balance of PLOI at the end of the month Annual interest rate for PLOI
(%)
Deemed interest amount for the month
[A]
Actual amount of interest payable for the month Footnote (1)
[B]
Year
January
February
March
April
May
June
July
August
September
October
November
December
Totals
Additional deemed interest income inclusion required for PLOI (total of A minus total of B), if negative enter 0
(Report the amount on Schedule 1 on line 210 (Deemed interest on loans to non-residents))

Application of credits and repayments

Repayments will be considered to apply first to the oldest loan or debt outstanding ("first-in, first-out" basis) unless specific allocation of the credit or repayment is requested in the election.

PLOI denominated in a foreign currency

Where a PLOI election is made in respect of a loan or indebtedness denominated in a foreign currency, for the purposes of amount A of the formula, the deemed interest is calculated by applying the relevant prescribed rate to the principal amount of the PLOI converted into Canadian dollars (or, if applicable, the taxpayer's elected functional currency) using the relevant spot rate on the day the loan or indebtedness arose.

For the purposes of amount B of the formula, the amount included in the CRIC's income on account of interest on the PLOI must be converted into Canadian dollars (or, if applicable, the taxpayer's elected functional currency) using the relevant spot rate on the day the interest is paid or becomes payable.

Late-filed elections

Filing a late-filed election

A late-filed election is valid if filed on or before three years after the filing-due date, and only if the required late-filing penalty is paid when the election is made. The election should provide the due date, the filing date, and the calculation of the penalty.

A full payment of the penalty is required for the election to be valid when the election is late-filed. If you have remitted the full penalty amount, provide the details of the payment with the election.

When filing a late-filed PLOI election, provide the information discussed in Information to be provided in respect of the PLOI election for each affected tax year or fiscal period from the year in which the loan or indebtedness arose to the year the election was filed. Also provide copies of amended Schedules 1 and 125 for each relevant year.

For a late-filed PLOI election involving a partnership or tiered partnerships, provide amended partnership return(s) for each partnership affected by the interest income inclusion (T5013 and applicable schedules including amended Schedules 1 and 125) for each relevant fiscal period. In addition, in order to request a reassessment to report the interest income inclusion on the respective CRIC's Income Tax Return, the CRIC must submit an amended Schedule 1 and Schedule 125, and any other schedules that are affected as a result of changes to these schedules.

Paying the late-filing penalty

A penalty must be paid in the amount of $100 for each month, or part thereof, that a PLOI election is filed late. A part month includes one single day in that month.

A penalty must be paid in the amount of $100 for each month, or part thereof, that a PLOI election is filed late. A part month includes one single day in that month.

Administrative relief for the penalty

Under the Act, a PLOI penalty is applicable for each amount of loan or indebtedness. As such, a late-filed PLOI election will be considered invalid and not accepted where the penalty payment is insufficient in relation to the number of PLOIs that the election is intended to cover.

For elections that are processed on or after April 11, 2022, provided that all required information is included with the election, the CRA will apply the new administrative policy described in Change in administrative policy and grant administrative relief with respect to the calculation of any late-filing penalty. Where multiple amounts owing are governed by the same legal instrument (such as a revolving credit facility) and included in a late-filed PLOI election, the election will be considered as one incident of late-filing for the purposes of the late-filing penalty calculation.

Retroactive application of the administrative relief

In certain circumstances, a CRIC that has been assessed a late filing penalty in respect of a PLOI election filed before April 11, 2022, may make a request to have their late-filing penalty reassessed taking into account the new administrative policy. Specifically, the CRA will reassess the late filing penalty where:

  • the request is sent in writing to the CRIC's tax centre and received by the tax centre before the expiry of the normal reassessment period of the CRIC's tax year in which the PLOI arose
  • to the extent the information was not provided in the original election, the request includes all of the information required for elections made after April 11, 2022, as described in Information to be provided in respect of the PLOI election

Before a penalty is reassessed, the CRA may undertake a review of the PLOI, to ensure that the correct amount of the section 17.1 deemed interest has been included in the CRIC's income.

Signatures

Subsection 15(2.11) PLOI election

Subject to Electronic signatures and COVID-19 pandemic, ensure the subsection 15(2.11) PLOI election is signed by an authorized officer of the CRIC and an authorized officer of the non-resident corporation that controls the CRIC. In the case of an amount owing to a QCP, all the members of the QCP (or one member designated to sign on their behalf) and an authorized officer of the non-resident corporation that controls the CRIC must sign the election. If a member has been designated to sign the election on behalf of the other members, a letter of authorization must be attached to the election. Failure to provide adequate signatures by the relevant parties invalidates the election.

Subsection 212.3(11) PLOI election

Ensure the subsection 212.3(11) PLOI election is signed by an authorized officer of the CRIC and an authorized officer of the non-resident parent that controls the CRIC.

For PLOI elections in respect of amounts that became owing after March 18, 2019, where the CRIC is controlled by a group of persons and if one of the group has been designated to sign the election on behalf of the other persons in the group, a letter of authorization must be attached to the election. Failure to provide adequate signatures by the relevant parties invalidates the election.

Electronic signatures and COVID-19 pandemic

Due to the COVID-19 pandemic, the CRA will temporarily recognize electronic signatures as having met the signature requirements of the Act. This policy applies in respect of a PLOI election. For further information on the measure and period of application, see CRA and COVID-19: Electronic signatures.

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