As tax and estate planning goes, advisors look for signs of things to come and events to happen. We have started to hear rumblings about rising interest rates perhaps suggesting some action may be required where prescribed rate loans are involved.
Last week I was alerted to the fact the Bank of Canada posted the average yield on 3 month treasury bills 1.17%. Should the average yield at the January 23rd auction be similar, the average yield for the month of January will be in excess of 1%. As a result the prescribed interest rate for income tax purposes will increase to 2% on April 1, 2018 for the second quarter of the year.
The prescribed interest rate is the minimum interest rate allowed by the Canada Revenue Agency on various non-arm’s loans such family loans. These loans are often put in place as a means to avoid attributions rules when splitting income with others in your family. The lent money may be used to invest in income-producing properties and the income is taxable in the hands of the borower, as long as the borrower pays the loan interest on time. Assuming the borrower can earn more than 1% on their investments the family may benefit from a lower overall tax bill.
Talk with your advisor about action required with new or existing loans.