Dual Rates of Interest on Underpayments and Overpayments of Tax

Tax Legislation Bulletin Number 96-4, December 1996

Introduction

This Bulletin deals with the new Ontario dual interest rate structure, effective January 1, 1997. Ontario announced in the 1996 Budget that it would implement a dual interest rate structure which uses a higher rate to calculate interest charged on underpayments of tax than the rate used to calculate interest paid on overpayments of tax.

In the 1996 Budget Ontario also announced that it would harmonize with various interest rules used by Revenue Canada for underpayments and overpayments of tax. As the federal government is currently reviewing its interest rules with respect to taxes, Ontario will defer its harmonization measure until the federal review is complete. Further information with respect to this measure will follow at a later date.

How are the dual rates determined?

The interest rate used to calculate interest charges on underpayments of tax (which includes instalments of tax, penalties and any other amounts owing under the Ontario tax statutes affected by this measure) will be set at 3 percentage points higher than the base rate of interest.

The interest rate used to calculate interest paid on overpayments of tax (which includes refunds) will be set at 2 percentage points less than the base rate.

To determine the base for its interest rates, Ontario will continue to use the mean, rounded to the nearest whole percentage, of the prime rates of the Royal Bank of Canada, The Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, the Bank of Montreal, and the Toronto-Dominion Bank.

A base rate of interest is established by Ontario quarterly on January 1, April 1, July 1 and October 1 of each year. It is based on the above mean rate on the 15th day of the first month of the previous quarter. For example, the base rate of interest on January 1, 1997 will be 6%, which is the mean of the prime rates of the above banks on October 15, 1996.

Why are the new rates necessary?

The dual interest rate structure will bring Ontario in line with the rate structures used by the federal government and most other provinces.

The higher rate used to calculate interest charges for unpaid tax is comparable with the rates charged by Revenue Canada and other provinces. This will ensure that no interest rate preferences exist for paying the taxes of these other jurisdictions prior to Ontario taxes, as was previously the case when Ontario's rates were lower than the rates charged by the other jurisdictions.

The new rate used to calculate interest paid on overpayments of tax will provide compensation that is more in line with prevailing market rates.

Statutes Affected by Measure

Employer Health Tax Act

Corporations Tax Act

Mining Tax Act

Race Tracks Tax Act

Retail Sales Tax Act

Gasoline Tax Act

Fuel Tax Act

Land Transfer Tax Act

Provincial Land Tax Act

Tobacco Tax Act

Small Business Development Corporations Act

Commercial Concentration Tax Act

Succession Duty Act

Regulations will be released shortly to prescribe the new interest rates effective January 1, 1997.

Rates Effective January 1, 1997

For the quarter January 1 to March 31, 1997, the following interest rates will apply:

Overpayments 4%

Underpayments 9%

Historical Rates

For continuity purposes, the following table sets out the rates of interest for the past five years which applied to both underpayments and overpayments of Ontario taxes.

TIME PERIOD	RATE
Oct 1/91 - Mar 31/92	10%
Apr 1/92 - Sep 30/92	8%
Oct 1/92 - Jun 30/93	7%
Jul 1/93 - Jun 30/94	6%
Jul 1/94 - Sep 30/94	7%
Oct 1/94 - Dec 31/94	8%
Jan 1/95 - Mar 31/95	7%
Apr 1/95 - Jun 30/95	9%
Jul 1/95 - Sep 30/95	10%
Oct 1/95 - Jun 30/96	8%
Jul 1/96 - Dec 31/96	7%

For further information please contact:

The Ministry of Finance
Corporations Tax Branch
Tax Advisory
33 King Street West
Oshawa, Ontario  L1H 8H5
Telephone 905 433-6513
Facsimile 905 433-6747