Adrian Mastracci, president of KCM Wealth Management says, "This is one of the few forms of income splitting still available for spouses."

Vancouver, BC (March 14, 2002): An important planning opportunity exists where one spouse is in a lower income tax bracket than the other. It involves loaning funds from one spouse to the other.

Adrian Mastracci, president & fee-only investment counsel at Vancouver based KCM Wealth Management comments, "You may consider lending your spouse some money if your spouse is in a lower income tax bracket than your own or in a low income. The benefits are well worth looking at."

"The key is to charge interest at least at the Canada Customs and Revenue Agency prescribed rate on all funds loaned to your spouse," notes Mastracci, "The prescribed rate for the first quarter ending March 31, 2002 is set at 3%."

"The great news is that the prescribed rate drops to 2% for the second quarter ending June 30, 2002," remarks Mastracci, "Better yet, the loan rate can be locked in for a long period of time."

"The recipient spouse invests the funds and reports the income earned on the investments," says Mastracci, "However, the recipient must pay the interest to the lender spouse not later than January 30 of each year following the loan."

"Let's illustrate the process. Say one spouse loans $200,000 to the other at the 2% prescribed rate who then invests it at 5%. The recipient spouse is then taxed on the 3% difference," explains Mastracci, "In this instance, an annual income of $6,000 is shifted to the lower income spouse."

"Making this a long-term arrangement has planning appeal," says Mastracci, "All of the investment income in excess of 2% can be taxed in the hands of the lower tax bracket spouse."

The following also applies to spousal loans:

• Documentation between the spouses is required as evidence of the loan.
• There must be actual loan interest payments made to the lending spouse.
• The lending spouse reports the 2% loan interest income.
• The CCRA prescribed rate is set every calendar quarter.
• The 2% prescribed rate is the lowest ever.
• The prescribed rate may rise for the third quarter.
• Make sure you pay attention to all the rules.

"This is one of the few forms of income splitting still available for spouses. Over time, and depending on the amount of funds loaned, the lower income spouse can accumulate a bigger nest egg," outlines Mastracci, "It can then be used as a source of income for both now, and during those financial independence or retirement years."

"Loans to a spouse should be made for investment as opposed to consumption purposes," indicates Mastracci, "The recipient spouse pays the prescribed rate regardless of the loan purpose."

"For business owners, there are other variations on this income splitting opportunity that involve family trusts and loans to shareholders," outlines Mastracci, "The shareholder loan rules are much more involved. Therefore, seek professional counsel."

"Clearly, this income splitting provision can achieve significant income tax savings. Especially over a number of years," concludes Mastracci, "More importantly, the family nest egg improves."

"Follow the rules closely if you intend to take advantage of this planning opportunity at the upcoming 2% rate," summarizes Mastracci, "All your strategies, arrangements and documentation must be in place between April 1, 2002 and not later than June 30, 2002."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.