Tax Idea: Act Now to Lock in Family Income-Splitting Loans by March 31

Dymond Scruton Advisory Group - Feb 10, 2018

A great way to lower your tax bill may be to take advantage of "prescribed-rate loans".  But you'll need to act now, as the current CRA rate of 1%, which has been in place since 2014, is set to double on April 1st, 2018.

A great way to lower your tax bill may be to take advantage of "prescribed-rate loans".  But you'll need to act now, as the current CRA rate of 1%, which has been in place since 2014, is set to double on April 1st, 2018.

Basically, the idea is that you can lend money for investment purposes to a lower income spouse or minor child, by way of a family trust, who earns little to no other income and will pay little to no tax.  Then, all of the investment income earned will be taxed to that person, at the lower rate and possibly not at all, in the case of minor children.

This can be a very effective income-splitting tool and also a great way to pay for kids education and even extracurricular activities.  

However, the catch is that in order to avoid "attribution rules" and have the income taxed back to the original person, you must put in place a documented "prescribed-rate loan", which is currently at the very low rate of 1% and if put in place before April 1st, will stay at that rate for the entire life of the loan, before doubling to 2%.

 

Here is a look at how the spousal loan idea works, from our Wealth & Estate Planning team.

 

Also, here is a detailed breakdown, from Mark Goodfield, Tax Partner at BDO Canada LLP, of how the loan idea works to pay for kids education and expenses.

 

Alternatively, just contact me and my team can discuss with you directly to help determine if this tax idea may make sense for you, or if there's anything else you may be able to take advantage of to lower your tax bill.

 

Sincerely,

 

Jeff Scruton