“Make sure the correct amount of interest is paid by January 30 each year.”
When a parent gifts or lends property to a minor child, any income from the property gifted or lent will be treated as income of the parent rather than the child. There is an exception for capital gains earned by minors. Similar rules apply when an individual transfers property to his or her spouse. These “attribution” rules are intended to prevent shifting income from a high tax rate person to an individual with a lower tax rate.
Where funds are lent at an interest rate that is at least equal to the rate “prescribed” in the Regulations to the Income Tax Act at the time the loan is made, these rules will not apply.
For this exemption to apply, interest on the loan at the prescribed rate must be paid no later than January 30 in the calendar year following the year in which the loan was outstanding. If this 30-day deadline is missed, by even one day, attribution will apply. Missing one deadline will result in attribution for the remaining life of the loan.
The prescribed rate will be 1% from April 1, 2009 to June 30, 2009. The rate is currently 2%. The prescribed rate of 1% provides a very good opportunity to implement this type of income-splitting strategy, as the interest rate is locked in at the rate that applied when the loan was made (even if prescribed rates subsequently increase).
Using this strategy at the 1% rate can have significant benefits, but make sure the correct amount of interest is paid by the following January 30.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.