If you are paying the highest marginal rate of tax, income splitting with your low-income family members via a prescribed interest rate loan can substantially reduce your collective tax bill by thousands of dollars. With Canada Revenue Agency’s prescribed rate is set to double to two per cent on July 1, 2022, now is the time to lock in the current one per cent prescribed rate.
One of the most common income splitting strategies for families is the prescribed rate loan strategy. Basically, this strategy involves a high-income individual lending money to a trust established for the benefit of a low-income family member at the CRA prescribed interest rate to decrease their collective tax bills.
Subsequently, the Trustee invests the loaned funds for the purpose of generating investment income. This means that interest, dividends, and capital gains earned in the trust will be taxed as if the beneficiary earned these types of income personally (at the lower tax rate).
The CRA’s prescribed rate is set to double to two per cent on July 1, but if you act quickly, you can lock in the current rate. Do it now before the rate rises because the percentage is locked in for the life of the loan.
This strategy is particularly relevant to couples looking to maximise their after-tax investment income during retirement. It also provides a tax efficient means of gifting during one’s lifetime through the income that is earned, while retaining access to the capital loaned.
MacMillan Estate Planning’s team of estate planners, including in-house lawyers, accountants and financial planners have an arsenal of innovative solutions and tax minimization strategies available to families, helping to protect and preserve your wealth. Please take advantage of our complimentary consultations; call us or email us: 1-833-266-6464 / inquiry@macmillanestate.com to learn more.