Summary: The Bank of Canada’s policy rate is well below its peak, but borrowing costs still require careful planning. Rather than trying to predict the next rate move, business owners should prepare for a range of interest-rate scenarios by reviewing their debt, cash flow, tax position, and investment plans.
Where Rates Stand and Why Positioning Beats Prediction
Canada’s policy interest rate has eased from its cycle peak, although the outlook remains mixed. In October 2025, the Bank of Canada lowered its policy rate to 2.25%, where it stayed through a sixth consecutive hold on July 15, 2026. This marked a substantial shift from the 5.0% peak reached in July 2023, before rate cuts began in June 2024. 1
Even so, the typical prime rate posted by Canada’s six major chartered banks was still 4.45%.² At the end of May 2026, the month-end rate on newly advanced business loans was 4.64%, compared with 4.67% on outstanding balances.³
Canada faces a two-sided economic outlook driven by intense trade conflicts with the United States along with persistent trade and inflation risks. The Bank of Canada could cut its rates further if new US trade restrictions weigh on growth, or tighten if energy-driven inflation re-accelerates.²³ Canada posted a technical recession across late 2025 and 2026, with two consecutive quarters of economic contraction.²⁴ No one is confidently forecasting the next rate move, which is exactly why positioning your business to handle either direction matters more than prediction.
For Canadian businesses planning new borrowing or managing existing debt, preparation matters more than predicting the next rate move. Lenders consider your business’s financial strength, cash flow, existing debt, collateral, management, and credit history.⁴ To manage changing interest rates without disrupting your operations or long-term plans, focus on these four areas:
- Reprice and restructure debt.
- Protect cash flow at higher debt-service levels.
- Interest deductibility and the EIFEL trap.
- Use prescribed-rate planning and reassess the cost of capital.
1. Reprice and Restructure Your Debt
Term loans, operating lines, and commercial mortgages arranged or renewed during the policy rate’s 5.0% peak between July 2023 and early June 2024may no longer offer the best terms.¹ Review the following areas to identify where you may be able to reduce costs, improve flexibility, and protect working capital.
Map your debt and match it to its purpose
The Business Development Bank of Canada (BDC) offers a useful rule: use short-term credit for short-term needs and long-term financing for long-lived assets.⁵ Using an operating line to buy equipment, for example, can reduce the cash available for payroll, suppliers, and growth.
If the line remains heavily drawn throughout the year, it may be covering a permanent funding need rather than a temporary cash-flow gap. A term loan may free up operating room and better align repayment with the asset’s useful life.
Test how much debt your business can carry
The fixed-charge coverage ratio (FCCR) shows whether enough cash remains after taxes and unfinanced capital spending to meet required debt payments.⁶ In this calculation, EBITDA means earnings before interest, taxes, depreciation, and amortization.
Most banks look for a fixed-charge coverage ratio of at least 1.25, although the formula and required ratio may vary by lender. Put simply, a ratio of 1.25 means your business has $1.25 available to cover every $1 of cash interest and mandatory principal repayments.6
Run the calculation using the proposed repayment schedule. Then repeat it with revenue or margins below plan and borrowing-rate increases of 0.5 percentage points and 1 percentage point. Your lender’s covenant definition and loan agreement should stay as the final reference.
Choose fixed or variable debt based on cash-flow tolerance
Variable-rate financing may become cheaper if prime falls, but payments can rise if rates increase. Fixed-rate financing offers more predictable costs, although it may start at a higher rate and include less flexibility, with prepayment penalties.⁷ Some lenders allow you to split the loan between fixed and variable portions, giving you both payment certainty and some benefit if rates fall.
Negotiate terms, not just the rate
Speak with lenders before renewal approaches or your finances become strained. Current financial statements and reliable forecasts can strengthen your position. Ask about the repayment period, financial conditions, security, prepayment rights, and whether the loan is demand or non-demand.⁸
Do not compare rates or monthly payments alone. Include interest, lender fees, legal and appraisal costs, prepayment penalties, security requirements, and borrowing restrictions. A longer amortization can lower monthly payments but increase the total interest paid.⁸
2. Protect Cash Flow at Higher Debt-Service Levels
Current business-loan rates still make cash-flow discipline important. These steps can help you anticipate shortages and free up cash for debt payments and operations:
- Run a 13-week forecast every week: A rolling 13-week cash-flow forecast can provide tighter near-term visibility than a monthly budget alone.⁹ Update expected receipts, payroll, taxes, supplier payments, debt payments, capital spending, and covenant-testing dates.
- Get cash back into the business faster: Track the cash conversion cycle: inventory days + receivable days − payable days.¹⁰ A shorter cycle puts cash back into the business sooner. Improve it by invoicing promptly, following up on overdue accounts, reducing slow-moving stock, and requesting deposits or progress payments on larger jobs. Aprio’s cash-flow guide provides a broader checklist.¹¹
- Clear tax balances early: From July 1 through September 30, 2026, the Canada Revenue Agency (CRA) charges 7% interest on overdue taxes and specified remittances, compounded daily.¹² If that rate remained unchanged for one year, a $250,000 balance would accumulate approximately $18,125 in interest before penalties.¹² If you cannot pay in full, contact the CRA promptly about a payment arrangement. Interest generally continues to accrue, so compare the cost with available commercial financing and other options.¹³
3. Interest Deductibility and the EIFEL Trap
Canada’s excessive interest and financing expenses limitation rules (EIFEL) may limit the net interest and financing expenses that some corporations and trusts can deduct. For tax years beginning on or after January 1, 2024, the general limit is 30% of adjusted taxable income, a tax measure similar to EBITDA but calculated under different rules.¹⁴
Find out whether your business is excluded
Not every business is subject to EIFEL. Your business may be excluded if any one of these conditions applies:
- It was a Canadian-controlled private corporation throughout the year and, together with associated corporations, had less than $50 million of taxable capital employed in Canada.
- Its applicable group had net interest and financing expenses of $1 million or less.
- It meets the detailed domestic-business exception.¹⁵
The limits often apply to the whole group, not just one company. For example, a company with $600,000 of net interest and financing expenses may not qualify for the $1 million exclusion if related entities push the group total above that amount.¹⁵
Check whether more interest can be deducted
If EIFEL limits your deduction, some of the interest may still be deductible. Depending on your situation, your business may be able to:
- Deduct more than the standard 30% limit if the group’s audited consolidated financial statements support a higher amount.
- Use unused deduction room from the previous three years, including room transferred from an eligible group company.
- Exclude certain interest between eligible Canadian group members.
- Deduct interest restricted in an earlier year when enough deduction room becomes available.¹⁶
These options have specific conditions and filing deadlines. The CRA uses Form T2225 for the group-ratio election, Form T2226 for transfers of unused room, and Form T2227 for qualifying interest between group members.¹⁶ An Aprio tax professional can help identify available relief, reduce the risk of errors, and support a well-documented filing position.
4. Use Prescribed-Rate Planning and Reassess the Cost of Capital
Lower rates may also create tax-planning and investment opportunities. The CRA’s prescribed rate for certain interest-free and low-interest loans is 3% through September 30, 2026, down from 6% in the first quarter of 2024.¹⁷
The rate changes quarterly and is based on Government of Canada Treasury bill yields.¹⁸ Confirm the current rate before completing a loan. Two areas are worth reviewing:
Consider a prescribed-rate family loan
A higher-income individual may lend investment funds to a lower-income spouse, common-law partner, or family trust at the prescribed rate in effect when the loan is made. Interest must be paid by January 30 of the following year and by the same deadline each year thereafter.¹⁹
If the rules are followed, investment income above the interest may be taxed to the borrower or beneficiaries.¹⁹ Compare the expected after-tax return with the interest, professional fees, administration, and investment risk.
Revisit projects and valuations
Your cost of capital combines the cost of debt and equity.²⁰ Lower borrowing costs may make delayed projects more attractive, so reassess them using current financing costs, taxes, working-capital needs, expected returns, and possible setbacks. Do not assume all interest will be immediately deductible if the EIFEL rules apply.
Lower discount rates may also increase a calculated business valuation, but earnings, debt, customer concentration, growth prospects, buyer demand, and risk still matter.²⁰ Update your valuation and financing assumptions before a sale, shareholder buy-in, succession, or major investment.
Final Thoughts: Prepare Your Business for the Next Interest Rate Move
For Canadian businesses, the strongest response to rate uncertainty is preparation, not prediction. Review debt before renewal, match each facility to its purpose, and compare the full cost and terms rather than the headline rate alone.
Keep a close watch on cash flow, test whether the business could absorb weaker sales or higher borrowing costs, and clear costly tax balances early. Staying prepared can protect your cash flow while giving your business the flexibility to act when conditions change.
Notes
- Bank of Canada, “Bank of Canada Raises Policy Rate 25 Basis Points, Continues Quantitative Tightening,” July 12, 2023; Bank of Canada, “Bank of Canada Reduces Policy Rate by 25 Basis Points,” June 5, 2024; Bank of Canada, “Bank of Canada Lowers Policy Rate to 2¼%,” October 29, 2025; Bank of Canada, “Bank of Canada Maintains the Policy Rate at 2¼%,” July 15, 2026; Bank of Canada, “Policy Interest Rate,” accessed July 24, 2026.
- Bank of Canada, “Interest Rates Posted for Selected Products by the Major Chartered Banks,” data for July 15, 2026, accessed July 24, 2026.
- Bank of Canada, “Interest Rates Charged for New and Existing Lending by Chartered Banks,” data for May 2026, accessed July 24, 2026.
- Business Development Bank of Canada, “How a Bank Looks at Your Business,” accessed July 24, 2026.
- Business Development Bank of Canada, “What Is a Line of Credit?,” accessed July 24, 2026.
- Business Development Bank of Canada, “How Much Can I Borrow for My Business?,” August 26, 2024.
- Business Development Bank of Canada, “Fixed-Rate or Variable-Rate Loans: Which Is Best for Your Business?,” January 18, 2023.
- Business Development Bank of Canada, “What Is a Demand Loan?,” accessed July 24, 2026; Business Development Bank of Canada, “Business Loan Calculator,” accessed July 24, 2026.
- Business Development Bank of Canada, “Preparing Your Finances for an Economic Slowdown,” accessed July 24, 2026.
- Business Development Bank of Canada, “Cash Conversion Cycle: An Essential Tool to Boost Your Cash Flow,” accessed July 24, 2026.
- Aprio, “Five Operational Levers to Improve Cash Flow Without Raising Prices,” June 16, 2026.
- Canada Revenue Agency, “Interest Rates for the Third Calendar Quarter,” 2026; Canada Revenue Agency, “Understanding Interest,” accessed July 24, 2026. The illustration assumes a constant annual rate of 7%, compounded daily: $250,000 × [(1 + 0.07 ÷ 365)³⁶⁵ − 1] = approximately $18,125.
- Canada Revenue Agency, “Arrange to Pay Your Debt Over Time,” updated February 10, 2026; Canada Revenue Agency, “Interest and Penalties on Late or Incorrect Payments,” updated January 20, 2026.
- Canada Revenue Agency, “Excessive Interest and Financing Expenses Limitation Rules,” accessed July 24, 2026; Canada Revenue Agency, “Supplemental Instructions and Guidance for Filing Under the Excessive Interest and Financing Expenses Limitation Rules,” updated June 2026.
- Canada Revenue Agency, “Excessive Interest and Financing Expenses Limitation Rules,” section titled “Excluded entities,” accessed July 24, 2026. The exclusions are subject to detailed statutory and group-level conditions.
- Department of Finance Canada, “Bill C-59: Excessive Interest and Financing Expenses Limitation Rules,” accessed July 24, 2026; Canada Revenue Agency, “Excessive Interest and Financing Expenses Limitation Rules,” sections covering Forms T2225, T2226, and T2227, accessed July 24, 2026.
- Canada Revenue Agency, “Interest Rates for the Third Calendar Quarter,” 2026; Canada Revenue Agency, “Interest Rates for the First Calendar Quarter,” February 28, 2024.
- Department of Finance Canada, “Canada Revenue Agency Rates,” accessed July 24, 2026.
- Canada, Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), subsections 74.5(1) and 74.5(2).
- Business Development Bank of Canada, “What Is Weighted Average Cost of Capital?,” accessed July 24, 2026; Business Development Bank of Canada, “What Is Net Present Value?,” November 20, 2025; Business Development Bank of Canada, “What Is Enterprise Value?,” accessed July 24, 2026.
- Aprio, “Aprio Canada,” and “Five Operational Levers to Improve Cash Flow Without Raising Prices,” accessed July 24, 2026.
- Aprio, “Contact Us,” accessed July 24, 2026.
- Bank of Canada, “Summary of Governing Council Deliberations: Fixed Announcement Date of July 15, 2026,” July 22, 2026.
- Statistics Canada, “Gross Domestic Product, Income and Expenditure, First Quarter 2026,” The Daily, May 29, 2026.
