All About Estates

A Nice Gift to Give to your Spouse… a Loan

The Canada Revenue Agency has announced the 2010 third quarter prescribed interest rate used to calculate taxable benefits for employees and shareholders for interest-free and low interest loans would be 1%.  With this the lowest historical prescribed rate ever, it is an opportune time for taxpayers to reduce the tax bite through an income-splitting structure using loans.
Under the Income Tax Act many income-splitting arrangements are no longer available.  However, not all is for naught.  For instance, it is open for one spouse to loan funds to the other spouse to make an investment.  In order for attribution to be avoided, with respect to both income and capital gains earned on the lent property or property substituted therefore, interest must be charged on the loan at the 1% prescribed rate.  The best news is that this 1% interest rate is locked in for the term of the loan.  The interest must, however, be paid no later than January 30th following the end of a calendar year, and there can be no defaults in the payment of interest for any year.

With the prescribed rate at 1%, there is an opportunity here for income splitting on the assumption that the property substituted for the lent property earns income and realized capital gains in excess of the prescribed rate of interest that must be paid to the lending spouse.  In order for this strategy to be effective, the payment of interest must be satisfied each year.  A failure to pay interest in one year is fatal as attribution to the lending spouse will result in subsequent years.

There are other income-splitting structures available, such as a loan to a discretionary family trust, the beneficiaries of which include minor children.  Where minor children are beneficiaries of a discretionary family trust, significant tax savings can be achieved.  Where a parent lends money to the trust at the 1% prescribe rate, there is no attribution of the income or realized capital gains to the lending parent.  If the parent gives money to the trust income splitting can still be achieved in respect of realized capital gains.

Happy Thinking

Corina S. Weigl

About Corina Weigl
Corina Weigl is a partner in the Trusts, Wills, Estates and Charities group at Fasken, a leading international law firm with over 650 lawyers and 9 offices worldwide that offers comprehensive estate planning, estate administration, personal tax planning, charitable giving and estate litigation services. Email: