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By Michael Kane
Vancouver Sun
Saturday, March 16, 2002
Here's a prescription for saving money from an unlikely source
-- the tax collector.
Canada Customs and Revenue Agency has set its "prescribed
rate" of interest for family loans at a record low two percent
commencing April 1.
This creates a rare, time-limited opportunity for family income
splitting, says Michael Matifat.
Individuals can lock in a family loans at this low rates and shift
the investment income earned on the loaned funds to a spouse or
minor child who has little or no income and thus pays little or
no tax. The result is significant future tax savings, as long as
the lower-income family member earns a rate of return of two percent
or greater.
Adrian Mastracci, president and fee-only
investment counsel at KCM Wealth Management says,
“The great news is that the prescribed rate drops to
two percent but better yet, the loan rate
can be locked in for a period of time.”
It is necessary to charge interest on the loan to stay on side
with the tax department.
Under the income attribution rules, if you give money to your spouse
or minor children, any future income earned on that money is included
in your income. The rules are aimed at preventing income splitting.
However, a legitimate way to avoid the attribution rules is to
lend money or transfer property and charge the prescribed rate of
interest in effect at the time of the loan.
The prescribed rate is that every quarter by Canada Revenue and
currently stands at three percent. From April 1 to June 30 it falls
to two percent. After that, rates may start inching up.
“The great news is that the prescribed rate drops to two percent
but better yet, the loan rate can be locked in for a period of time,”says
Adrian Mastracci, president and fee-only investment counsel at Vancouver's
KCM Wealth Management.
In effect, Mastracci says, you can arrange for all investment income
over two percent to be taxed at a lower-earning family member's
tax rate indefinitely.
The key is to document the loan and make sure the interest is paid
to you for each year the loan is outstanding.
For example, if you lend money to your spouse at two percent interest
and he or she invests it at five percent, then two percent of the
return would effectively be charged to you and three percent to
your spouse. That is, your spouse will include the five percent
in income but get a two percent deduction for the interest paid
to you, and you will include that two percent in your income.
The technique only works if you elect that the money transferred
to your spouse is not subject to the tax-free "rollover"
that otherwise applies to property transferred between spouses,
says Russ Wilson.
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