CRA interest on overdue tax.
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Interest accrued
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How fast a tax debt actually grows
When you owe the CRA and miss the payment deadline, interest does not sit still. It compounds daily on the outstanding balance at the prescribed rate plus 4 percentage points. The prescribed rate moves quarterly with short-term government yields, and in recent years the all-in arrears rate has hovered around 8 to 10 percent. This tool defaults to 10 percent so you see a realistic worst case. Crucially this is not the same prescribed rate used for family loans or employee benefits. The overdue-tax rate carries that extra 4 point markup, and it is not tax deductible for an individual, so the real bite is larger than the headline number suggests.
Six months on a $10,000 balance
Picture a $10,000 balance owing on your personal return, left unpaid for six months at a 10 percent annual rate. The calculator converts the annual rate to a daily figure by dividing by 365, then compounds it across roughly 180 days. The daily rate is tiny, about 0.0274 percent, but daily compounding and the size of the debt still add up.
The shaded growth below traces the balance climbing from $10,000 to about $10,505 over the half year. The curve is gentle here, but stretch it across two or three years and the compounding becomes obvious.
Interest is only half the bill
The mistake people make is assuming interest is the whole cost of being late. It is not. If you file your return late and owe money, the CRA also charges a late-filing penalty of 5 percent of the balance plus 1 percent for each full month the return is late, up to 12 months. That penalty is calculated separately and then interest compounds on top of it. A repeat offender faces a stiffer 10 percent plus 2 percent per month. This is why the single most valuable move is to file on time even when you cannot pay, because filing on time avoids the penalty entirely and leaves only the interest, which is the cheaper of the two.
Who needs this and a practical tip
This is for anyone carrying an overdue balance: a self-employed filer who underpaid, someone who missed a quarterly instalment, or a taxpayer reassessed after an audit. A tip that saves real money: the CRA will not waive interest just because you ask, but under the taxpayer relief provisions it can cancel interest and penalties caused by circumstances beyond your control, such as serious illness, a natural disaster, or a CRA processing error. If your situation fits, file Form RC4288 with documentation rather than simply paying the full accrued amount. Relief is discretionary and generally limited to the most recent ten years, so do not assume an old balance qualifies, and apply as soon as the qualifying event ends.
If you genuinely cannot pay in full, the more productive move is usually to call the CRA and arrange a payment plan rather than ignoring the debt. Interest keeps compounding while you pay, but a documented arrangement stops the file from escalating to collections action, which can include garnishing wages or freezing a bank account. The interest does not pause during a payment plan, so pay it down as fast as the plan allows, since every extra dollar paid early removes that dollar from tomorrow’s compounding base.
A common mistake that doubles the cost
The error I see again and again is a taxpayer who cannot afford their balance choosing not to file at all, reasoning that filing late is pointless if they cannot pay. That is backwards. The late-filing penalty is triggered by filing late, not by paying late, so skipping the return invites the 5 percent plus monthly penalty on top of interest. Filing on time and paying what you can, even partially, is almost always the cheaper path because it sidesteps the penalty entirely.
Does the prescribed rate ever change while I owe?
Yes. Unlike a prescribed-rate family loan, the overdue-tax rate is not locked. It resets every calendar quarter, so a debt held for a year may pass through two or three different rates. This tool models a single fixed rate, so for a long-standing balance treat the result as an estimate and check the CRA quarterly interest rate table for the exact periods.
Can I deduct the interest the CRA charges me?
For personal income tax debts, no. Interest on overdue individual taxes is a personal expense and not deductible. The picture differs for some business contexts, but a typical individual cannot write off CRA arrears interest, which makes paying the balance down quickly the only way to stop the cost.