The CRA now charges 7% on what you owe — is that your most expensive debt?
CRA's overdue-balance rate sits at 7%, compounded daily, while refunds earn 5%. Here's what a $5,000 tax bill really costs over 3, 6 and 12 months, and when borrowing elsewhere actually beats owing the CRA.
On October 1 the CRA reset its quarterly prescribed interest rates. The number that matters if you owe tax: 7% on overdue balances, compounded daily. Overpayments owed to you earn 5% (non-corporate), so the CRA pays you less than it charges you. That gap is worth understanding before you decide how to handle a tax bill you can't pay in full.
What a $5,000 balance actually costs
Interest starts the day after the due date and compounds daily. Here is what a $5,000 balance costs at 7% if it sits unpaid:
| Time owing | Interest at 7% |
|---|---|
| 3 months | about $87 |
| 6 months | about $180 |
| 12 months | about $363 |
Two features make this rate sneakier than it looks. First, daily compounding means the effective annual rate is a little over 7.2%. Second, the interest is not tax-deductible, so there's no offset at filing time. Your real cost is the full amount.
How that compares to your other options
Seven percent is not the worst debt most households carry, which is the point. Ranked by cost on the same $5,000 for six months (rates are illustrative — check your own):
- CRA balance at 7%: about $180.
- A bank line of credit around 9%: about $230.
- A credit card at 21–24%: roughly $560 to $640.
So if the choice is "leave it with the CRA" versus "put it on a credit card," the CRA is far cheaper. If the choice is "leave it with the CRA" versus "pull from a savings account earning 3–4%," paying the CRA is the better deal: you'd save 7% to avoid earning 3–4%. And if you hold cash in a TFSA or non-registered account earning less than 7% after tax, using it to clear the CRA balance is a guaranteed return you can't match elsewhere.
The CRA isn't a cheap lender, though. A low-rate line of credit near the prime rate can undercut it, and you control the repayment schedule.
The instalment version of the same problem
If you're self-employed, a landlord, or a retiree drawing from several income sources, the same 7% shows up during the year as instalment interest when you skip or short a quarterly payment. Run the numbers on a household that should have paid $2,500 each quarter and stopped after June: the instalment calculator puts the interest on the missed September and December payments at roughly $177 through to filing — before any penalty. The penalty only kicks in once instalment interest passes $1,000 in a year, so the larger risk is the April lump sum arriving all at once.
Not sure you have to pay instalments at all? Our guides on who actually has to pay and the three calculation options cover the $3,000 two-year test.
If you can't pay by the deadline
- File on time regardless. The late-filing penalty is separate and much worse than interest: 5% of the balance plus 1% per month, up to 12 months. Filing late to "wait until you can pay" is the one mistake that costs real money.
- Pay what you can immediately. Interest runs on the remaining balance, so every dollar paid early stops compounding.
- Ask about a payment arrangement. The CRA will often agree to instalments on a balance, but interest keeps accruing, so it's a scheduling tool and not a discount.
- Compare it to your cheapest alternative. If you can borrow below 7% against a line of credit or a family loan, that can beat the CRA, as long as you actually repay it on schedule.
- Check your withholding. If this keeps happening, fix the cause: adjust payroll withholding or your quarterly instalments so April stops being a surprise. Your take-home pay breakdown shows what's being withheld now.
The takeaway
Seven percent daily-compounded interest isn't a crisis, but it's a guaranteed, non-deductible cost, and it applies to money you'd otherwise have spent. Rank your debts by rate: clear credit-card balances first, then the CRA, and only then worry about cheaper borrowing like a low-rate line of credit. And never skip filing on time to buy yourself a few weeks.
Interest figures use the CRA's prescribed rates as reported for Q4 2026 and daily compounding; verify the current rate on canada.ca before acting. Instalment figure from the Metrestick instalment calculator. This is general information, not tax advice.