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.
Corina S. Weigl