CRA Debt vs Bank Loan Refinancing Calculator
CRA interest runs at the prescribed rate plus four points, compounds daily, and is not deductible. Work out whether borrowing commercially to clear the balance actually costs less, what the break-even rate is, and what the collection risk is worth removing.
saved by refinancing
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Staying on the CRA Balance
| Item | Basis | Amount |
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Borrowing to Clear It
| Item | Basis | Amount |
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What Refinancing Changes Beyond the Interest
| Item | Staying With CRA | Commercial Loan |
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Points That Decide This
What to Do Next
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Disclaimer: Interest on amounts owing to the Canada Revenue Agency is charged at the prescribed rate applicable to overdue taxes, which is set quarterly and has been the base prescribed rate plus four percentage points, and is compounded daily. Interest and penalties payable under the Income Tax Act are generally not deductible in computing income. Whether interest on money borrowed to pay a tax liability is deductible is a separate and contested question: paragraph 20(1)(c) permits a deduction only where borrowed money is used for the purpose of earning income from a business or property, and the Supreme Court of Canada in Bronfman Trust rejected arguments based on the indirect or economically equivalent use of borrowed funds. The Agency’s long-standing published position has been that interest on money borrowed to pay income tax is not deductible. This calculator therefore defaults to treating commercial interest as non-deductible and allows the alternative to be selected, but the position for any particular borrowing should be confirmed with your advisers before it is relied on. Amounts withheld as source deductions and net GST/HST collected are subject to director liability under section 227.1 of the Income Tax Act and section 323 of the Excise Tax Act, which is a separate exposure from the corporation’s own liability; corporate income tax is not recoverable from directors under those provisions. A requirement to pay issued under the Act obliges a third party holding funds for the debtor to remit them to the Agency. Entering into a payment arrangement does not stop interest from accruing. The rates, the calculation method and the compounding assumption used here are simplified for comparison and the results are estimates. This page is general information, not tax, legal or financial advice.
Three Things Make CRA Debt Expensive
The rate is the prescribed rate plus four percentage points, which puts it well above what most businesses would pay a bank. It compounds daily rather than monthly, so the effective cost is higher than the stated rate suggests. And it is not deductible, so every dollar of it comes out of after-tax money.
That last point is the one people miss. A deductible commercial interest cost of ten per cent and a non-deductible CRA cost of ten per cent are not the same cost at all, if the commercial interest is in fact deductible.
And that “if” is the whole question. Interest on money borrowed to pay income tax is generally not deductible, because the borrowed money is not used to earn income from a business or property. The Supreme Court rejected the argument that borrowing to replace funds notionally used for tax should be treated as if the borrowing itself were income-earning. So the simple story, swap non-deductible interest for deductible interest, usually does not hold.
What the Real Saving Is
Strip out the deductibility argument and refinancing still often wins, for less dramatic reasons. The rate differential is usually real, daily compounding is genuinely worse than a bank’s monthly calculation, and a fixed instalment on a commercial loan is predictable in a way a growing CRA balance is not.
But the saving is the rate gap rather than the rate gap plus a tax deduction, and any analysis that assumes otherwise overstates the case for borrowing. That is worth knowing before signing a facility on the strength of a number that was too good.
| Factor | CRA Balance | Commercial Loan |
|---|---|---|
| Rate | Prescribed plus four points | Whatever you can negotiate |
| Compounding | Daily | Usually monthly |
| Deductibility | Never | Usually not, for a tax borrowing |
| Predictability | Balance grows until cleared | Fixed instalment |
| Collection powers | Extensive and used without a court | Ordinary creditor remedies |
| Director exposure | On trust amounts | Only if personally guaranteed |
The Collection Risk Is Often the Real Reason
The Agency does not need a court order to act. It can issue a requirement to pay to your bank, your customers or anyone else holding money for you, and that party is obliged to remit to the Agency instead of to you.
A requirement to pay served on your largest customer is a commercial problem as much as a financial one. It tells a client that the business is in arrears with the government, and that is not a conversation most businesses recover from quickly.
That risk does not appear in any interest calculation. Where collections has already issued a legal warning, the case for clearing the balance is partly about removing a discretionary power from a creditor who can exercise it without notice, rather than about basis points.
Trust Amounts Are a Different Problem
Source deductions and net GST/HST collected are amounts held on behalf of someone else, and directors are personally liable for them under separate provisions. Corporate income tax is not recoverable from directors that way.
So the composition of the balance matters as much as its size. A corporation owing mostly trust amounts has directors with personal exposure that a commercial loan, repaid by the corporation, removes. A corporation owing mostly income tax does not have that exposure in the first place.
A Payment Arrangement Is Not a Pause
Agreeing an arrangement stops the collection action while it is being met. It does not stop interest, which continues to accrue on the declining balance at the same rate throughout.
An arrangement is therefore a cash-flow accommodation rather than a cost reduction. It is worth having where the alternative is enforcement, but it should not be mistaken for a settlement.
Relief from interest and penalties is a separate application. Taxpayer relief can be sought where circumstances beyond your control, financial hardship or an Agency error contributed to the position, and it is considered on its own merits. It is discretionary, it takes time, and it is not a reason to delay dealing with the balance, but it is worth assessing alongside any refinancing.
What Usually Goes Wrong
- Assuming the new interest is deductible, which overstates the saving considerably
- Borrowing without fixing the cause, so a new balance builds behind the loan
- Ignoring the personal guarantee a lender will usually require
- Leaving trust amounts outstanding while directors remain exposed
- Treating an arrangement as a settlement, when interest keeps running
- Waiting until a requirement to pay lands, by which point the options narrow
The arithmetic is the easy part of this decision. Our CRA collections and tax debt service covers negotiating the arrangement, assessing relief applications, dealing with the director exposure and working out whether refinancing genuinely helps.
Frequently Asked Questions
Common questions on refinancing a CRA balance.
Related Calculators and Guides
More tools for businesses carrying a CRA balance.
Deal With the Balance Before It Deals With You
Send us the statement of account and the facility being offered. We will confirm what the balance is actually made up of, assess the director exposure, test whether refinancing helps once deductibility is handled properly, and negotiate with collections if an arrangement is the better route.