Every quarter Canada Revenue Agency adjusts interest rates used for a variety of purposes. Common examples are interest charges on unpaid taxes, and interest paid on refunds. Another rate is that of interest used for shareholder loans, home purchase loans and loans to non-arms length parties under a variety of sections in the Income Tax Act.
Under the Income Tax Act Attribution rules, income earned on funds given to a spouse is taxed in the hands of the transferor unless certain conditions are met. The result is to eliminate the transferring of income from a higher earning and hence higher tax rate spouse to a lower-earning and lower tax rate spouse.
If the transferor spouse receives adequate consideration for their transferred funds, however, the attribution rules do not apply. One form of adequate consideration is a note payable. The caveat being, the interest rate charged on the loan must be at least that of the Canada Revenue Agency’s prescribed rates at the time the funds were advanced. Additionally, the interest must actually be paid no more than thirty days past the end of the year.
The prescribed interest rate for these loans continues to be 1%. We have never had interest rates this low before for such a prolonged time. If you find within your family, one spouse has a high level of invested funds with a correspondingly high income, it may be worth loaning funds to the lower-income spouse and have that spouse report any investment income while the higher income spouse simply reports the interest charged on the loan as income for tax purposes. The above rules also apply to loans to other family members. The loans must be properly documented and interest paid by proper deadlines. Please review your personal financial situation to see if there is a planning opportunity available for you.
Please note these rates are adjusted every quarter so this opportunity may or may not be available in the future.