Sometimes business owners have to decide which debt to pay off first. Business owners are often left in a position of trying to decide whether to take out a loan to pay their tax, or be assessed interest on any amounts that are outstanding.
There are two things to be considered in determining what is most cost effective.
One would need to compare the interest rate payable to the CRA versus the interest rate payable on a line of credit or other type of loan.
Currently, the CRA charges 5% interest on outstanding amounts and this rate is reviewed quarterly.
In addition, one would need to consider that any interest expense that is incurred on income taxes owing would not be deductible for business purposes, whereas the interest on a loan used to pay the tax would be deductible.
The current rate of tax for small business corporations in British Columbia is 13.5%. Not being able to deduct this interest would effectively add another .675 to the interest rate that you are paying.
As a result, if a business owner can obtain a loan for less than 5.675%, it makes sense to use outside financing.