Interest Charges by CRA: How They’re Calculated and How to Reduce Them – A Complete Guide by a Montreal CPA Firm Near You

Introduction

CRA interest charges can turn a small tax balance into a significant financial burden. Whether you filed late, underpaid taxes, were reassessed, missed GST/HST remittances, or owe payroll deductions, CRA charges compound daily interest—and the rate is significantly higher than most bank loans. Many taxpayers believe CRA interest is negotiable or tied to filing deadlines, but the rules are strict and unforgiving. This guide explains how CRA interest is calculated, when it applies, and how you can reduce or eliminate these charges through proactive tax planning.

Legal and Regulatory Framework

CRA interest rules are governed by the Income Tax Act, the Excise Tax Act (for GST/HST), and the Tax Administration Act (Quebec). CRA sets prescribed interest rates quarterly. Interest is charged on unpaid taxes, penalties, missed installments, payroll remittances, GST/HST balances, and certain reassessments. CRA is legally required to charge interest—it does not have discretion to waive it except under the Taxpayer Relief Program. Interest continues to accumulate until the full balance is paid.

Key Court Decisions

In Telfer v. Canada, the court upheld CRA’s strict interest application even when delays were unintentional. In Bozzer v. Canada, the Federal Court of Appeal clarified that CRA may waive interest for circumstances beyond a taxpayer’s control but only within the 10-year window. In Nassif v. Canada, interest charges were sustained even though the taxpayer disputed the underlying amount. These decisions demonstrate CRA’s rigid interest framework.

How CRA Interest Is Calculated

CRA charges compound daily interest starting the day after your payment deadline or reassessment. Interest is calculated on:

• Unpaid tax balances

• Unpaid penalties

• Missed or late installments

• GST/HST and QST balances

• Payroll remittance shortages
  Interest on personal taxes and corporate taxes is typically higher than bank lending rates. CRA interest is not tax-deductible, except in specific business-related cases.
  Example: If you owe $10,000 in taxes and the interest rate is 10%, interest accumulates daily and may exceed $1,000+ per year if unpaid.

Types of CRA Interest

1. Arrears Interest

Charged when you do not pay taxes by the deadline. Applies to individuals, corporations, GST/HST registrants, and payroll accounts.

2. Instalment Interest

Applied when you miss required instalments. Even if your tax return shows a refund, instalment interest may still apply if CRA believes instalments should have been paid.

3. Source Deduction Interest

This covers payroll taxes such as CPP/QPP, EI/QPIP, and income tax. Interest applies immediately if remittances are late.

4. GST/HST/QST Interest

Interest applies to missed filings, late remittances, improper ITCs, or reassessed balances.

Why CRA Interest Adds Up Quickly

CRA interest is:

• Compounded daily

• Applied to both tax and penalties

• Higher than most credit products

• Non-negotiable unless qualifying for Taxpayer Relief

• Applied retroactively back to the date the amount was originally due
  Because CRA continuously compounds interest, even small amounts can grow significantly.

Strategies to Reduce CRA Interest

1. Pay as Soon as Possible

Interest stops the moment CRA receives payment. Partial payments still reduce interest charged on the remaining balance.

2. File Even If You Cannot Pay

Late filing penalties are avoidable if you file on time. Filing on time prevents interest on penalties.

3. Use a Low-Interest Loan to Pay CRA

Bank loans or lines of credit often carry lower interest rates than CRA’s rate.

4. Request Taxpayer Relief

CRA may waive interest if your situation qualifies (serious illness, natural disaster, financial hardship, CRA error).

5. Correct Errors Quickly

If your reassessment is incorrect, file a Notice of Objection to pause collections (for income tax) and prevent further interest escalation on disputed amounts.

6. Pre-Pay or Adjust Instalments

Proactive instalment planning avoids unnecessary charges.

7. Improve Bookkeeping

Proper GST/HST and payroll management prevents remittance errors that trigger daily interest.

CRA Interest and Disputes

Filing a Notice of Objection pauses collection activities for income tax, but interest continues to accumulate until the assessment is overturned. For GST/HST and payroll, collections may continue even during objections unless formally negotiated.

Taxpayer Relief for Interest

Under the Taxpayer Relief Program, CRA may cancel or reduce interest for:

• Extraordinary circumstances (illness, tragedy)

• CRA processing delays or errors

• Inability to pay due to financial hardship

• Incorrect advice from CRA
  Relief is not automatic—you must apply with strong supporting documentation.

Mackisen Strategy

At Mackisen CPA Montreal, we minimize interest by correcting assessments quickly, preparing strong Taxpayer Relief applications, negotiating payment plans, optimizing instalment strategies, and ensuring full compliance with GST/HST and payroll rules. We analyze interest calculations for errors and challenge incorrect assessments through formal objections.

Real Client Experience

A Montreal contractor reduced interest by 70% through a successful Taxpayer Relief application. A corporation saved thousands after we corrected a payroll reassessment. A self-employed professional avoided instalment interest by restructuring quarterly payments. A business owner prevented further interest by disputing incorrect GST/HST findings immediately.

Common Questions

Can CRA interest be negotiated? No—except through Taxpayer Relief. Does CRA stop interest if I file an objection? No—interest continues. Can instalment interest apply even if I get a refund? Yes. Is CRA interest tax-deductible? Only in limited business cases.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal protects clients from excessive interest charges through strategic planning, rapid dispute resolution, and expert CRA negotiation. We ensure accuracy, compliance, and long-term financial stability.