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| Adrian Mastracci, president of KCM Wealth
Management says, "For business owners, there are other
variations on this income splitting opportunity that involve
family trusts and loans to shareholders."
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By Adrian Mastracci
Sounding Board
The Vancouver Board of Trade
May 2002 Issue
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.
You may consider lending your spouse some money if your spouse
is in a lower income tax bracket than your own or has a low income.
Normally, the attribution rules would negate the benefits, but,
in this case, they are well worth looking at.
The key is to charge interest at least at the Canada Customs and
Revenue Agency prescribed rate on funds loaned to your spouse.
The great news is that the prescribed rate drops to two per cent
for the second quarter ending June 30. 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. However, the recipient must pay the interest
to the lender spouse not later than January 30 of each year following
the loan.
As an example, one spouse loans $100,000 to the other at two per
cent who invests it at five per cent. The recipient spouse is then
taxed on the three per cent difference. The spouse reports the five
per cent income and the loan interest deduction of two per cent.
In this instance, an annual income amount of $3,000 is shifted
to the lower income spouse. If you make this a long-term arrangement,
all of the investment income in excess of two per cent is taxed
in the hands of the lower tax bracket spouse.
Documentation is required between the spouses as evidence of the
loan. Further, there must be actual interest payments made, and
the lending spouse must report the two per cent interest income
on the loan.
This is one of the few forms of income splitting between spouses.
Over time, the lower income spouse can accumulate a bigger nest
egg. It can then be used as a source of income for now and during
financial independence or retirement.
The CCRA prescribed rate is set every calendar quarter. The upcoming
two per cent prescribed rate is the lowest that it's been and may
well rise for the third quarter.
Loans of this type between spouses should be made for investment
as opposed to consumption purposes. 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.
The shareholder loan rules are much more involved, hence, seek professional
counsel if this applies to you.
Clearly, this income splitting provision can achieve significant
income tax savings. Especially over a number of years.
Follow the rules closely if you intend to take advantage of this
planning opportunity at the two per cent rate. All strategies, arrangements
and documentation must be in place before June 30, 2002.
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