Inflation, interest rates will have a surprising effect on your taxes next year

financialpost.com:

The Bank of Canada’s decision this week to hold its benchmark interest rate steady at five per cent as it attempts to battle inflation was welcome news for many. But the effects of both higher interest rates and inflation on the tax system will be felt in the new year in at least a couple of ways based on recent economic data available over the past week or so.

First, let’s start with the interest rate environment. It appears that even though the central bank’s rate isn’t rising, the Canada Revenue Agency’s prescribed interest rate will indeed increase (yet again) as of Jan. 1, 2024. The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury bills, but with a lag.

The calculation is based on a formula in the Income Tax Regulations that takes the simple average of three-month Treasury bills for the first month of the preceding quarter, rounded up to the next highest whole percentage point (if not already a whole number).

To calculate the rate for the upcoming quarter (Jan. 1 through March 31, 2024), we look at the first month of the current quarter (October 2023) and take the average of the three-month T-bill yields, which were 5.16 per cent (Oct. 10) and also 5.16 per cent (Oct. 24). Since the prescribed rate is then rounded up to the nearest whole percentage point, we get six per cent for the new prescribed rate for the first quarter of 2024. Contrast this with the historically low rate of one per cent we had from July 1, 2020, through June 30, 2022. The last time the prescribed rate was six per cent was more than 20 years ago in the second quarter of 2001.

The hike in the prescribed rate has a number of implications. To understand these, we should point out that