Interest charged by CRA on overdue taxes
Interest on unpaid amounts
Section 161 requires taxpayers to pay compound daily interest on any unpaid income tax, starting from the day after the balance is due (usually May 1). The prescribed interest rate changes quarterly and is set at the Bank of Canada rate plus 4%.
Plain-language explanation
Section 161 charges compound daily interest on any amount of income tax, CPP, or EI premiums that you owe but have not paid by the due date. Interest is not a fine or penalty — it compensates the government for the time value of money.
When interest starts: For individuals, interest on unpaid 2025 tax starts accruing on May 1, 2026 (the day after the April 30 payment deadline). If your return is for a self-employed person due June 15, the balance is still due April 30 — interest starts May 1 even if the return is filed later.
Interest rate: The prescribed rate is set quarterly at the Bank of Canada rate plus 4% (rounded up). It is compounded daily. In 2024–2025, this rate was in the range of 9–10%. You can look up the current prescribed rate on the CRA website.
Arrears interest is deductible: Interestingly, interest paid to CRA on income from a business or property source is deductible under s.20(1)(ll). Interest on personal income tax is not deductible.
Avoiding interest: Pay your balance owing by April 30 (even if filing late). You can make a payment online through CRA's My Account, your bank, or by mailing a cheque. Paying early is better than paying late — interest is compounded daily.
Example
Sophie owes $5,000 when she files her return on May 20, 2026. Interest starts May 1 (not the filing date). At 9% prescribed rate (daily compounding), 50 days of interest ≈ $5,000 × 9% × 50/365 ≈ $61.64. Small amounts but they grow quickly if ignored for years.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Prescribed interest rates fluctuated significantly 2022–2024 with Bank of Canada rate increases. As of 2024, the basic arrears rate is Bank of Canada rate + 4%, compounded daily.
Common questions
Can CRA waive interest under the taxpayer relief provisions? +
Yes. Under s.220(3.1), CRA can waive or cancel interest (and penalties) if you meet certain criteria: extraordinary circumstances beyond your control (serious illness, natural disaster), CRA errors or delays, or significant financial hardship. Submit Form RC4288.
Is interest on overdue taxes deductible? +
Only if the underlying tax relates to business or property income. Arrears interest on taxes attributable to business income is deductible under s.20(1)(ll). Interest on personal income tax (employment income, capital gains) is not deductible.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 161. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.