It’s a good idea to discuss this planning opportunity with your tax advisor
well before year-end, while the CRA’s prescribed interest rate for
inter-spousal loans is still at the very low level of 1%. Who knows how
long this attractively low tax rate will remain in effect?
Under normal attribution rules, any money transferred from one spouse,
typically the higher-income spouse, to another is deemed to be taxable in
the hands of the transferor, at that person’s higher marginal tax rate.
Income splitting opportunities are therefore thwarted.
However, inter-spousal loans are an important exception to this rule, as
long as they are set up and adhered to correctly. With such a loan, any
investment income earned from the money transferred to the lower-income
spouse will be taxed at that person’s lower tax rate. This can lead to
significant savings on the couple’s total tax bill.
Tax and financial advisors can calculate the tax advantages; setting up
inter-spousal loans now at the 1% prescribed rate locks in the rate for the
life of the loan. That’s important with the real possibility of more
interest rate hikes in the offing for 2018.
What else do you need to know about interspousal loans?
* The loan must be documented properly in writing, for example, with a
promissory note, including repayment terms.
* The lending spouse must charge the other spouse interest at least equal
to CRA’s prescribed rate (currently 1%).
* The spouse receiving the loan must pay the interest owing to the lender
every year (by January 30). Failure to meet this condition will result in
the normal attribution rules kicking in, meaning that income earned from
the lent money will be taxed in the hands of the higher-income spouse in
that year and all future years.
* The lending spouse is required to report the interest received as income
on his or her income tax return. Conversely, the borrowing spouse can
deduct the interest paid on his or her tax return, as long as the loan was
used to purchase income-producing assets with the potential of earning
passive income, within in a non-registered account.
* The spouse receiving the loan is required to pay back only the interest
due; there is no requirement to repay the principal.
Planning to split family income is an important part of year-end that
planning. See a qualified tax advisor, such as a
DFA-Tax Services Specialist, for help in setting up inter-spousal loans.
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Evelyn Jacks’ latest book,
Family Tax Essentials, is now available.
Notes and Disclaimer
©2017 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.