How does CRA calculate interest on a tax reassessment?
When CRA issues a reassessment and determines you owe additional taxes, it also charges arrears interest on the unpaid amount. This interest is calculated from the date the original tax payment was due — not from the date of the reassessment. That means if CRA audits a tax year from several years ago, interest accumulates for the entire period since the original due date.
CRA's arrears interest rate is the prescribed rate set each calendar quarter by the federal government plus 4 percentage points. Because the rate is set quarterly and applied on a daily compound basis, it can add up significantly over a multi-year audit. There is no cap on the interest.
In some cases you can apply to CRA for taxpayer relief (discussed separately) to request that interest be cancelled or waived, but relief is granted only in limited circumstances such as CRA error, natural disaster, or serious financial hardship. The most practical way to limit interest exposure is to pay disputed amounts into CRA as "payments on account" while you dispute the reassessment — CRA will refund the amount with interest if you succeed, and holding the payment stops further interest from running.
Key takeaways
- Interest runs from the original payment due date, not from when CRA reassessed you.
- CRA's arrears interest is the prescribed rate plus 4%, compounded daily.
- Multi-year audits can generate years of compound interest on top of the tax adjustment.
- Paying the disputed amount on account while objecting stops further interest from accruing.