top of page
Search
  • Charles Rotenberg

Keep Your Eye on the Prescribed Rate of Interest


While we are focussed on Finance Minister Morneau’s proposed tax changes, we still need to keep other tax issues in mind.

Those of you who have read my newsletters in the past are familiar with the idea of using a low interest loan between family members to allow lower income taxpayers to generate investment income. You can find a discussion of this strategy here. Essentially, if a taxpayer lends money to a spouse, child, etc. and charges the prescribed rate of interest, the income from the investment of those funds belongs to the borrower, not the lender. It is a simple way to move investment income to a lower income taxpayer.

There are a number of “prescribed rates”. The rate charged on overdue taxes, or paid on excess taxes remitted, is derived from the prescribed rate. In addition, the rate is used to calculate taxable benefits on interest-free or low-interest employee or shareholder loans, and applies to loans between family members who want to split income. The prescribed rate is set by the Canada Revenue Agency quarterly and is tied directly to the yield on Government of Canada 90-day Treasury Bills, albeit with a lag.

Since 2009, with the exception of 1 quarter in 2013, the prescribed rate for inter family loans and certain other benefits, has been 1%.

Once the loan is made and properly documented, as long as the interest is actually paid, the rate applicable when the loan is made will remain in place, regardless of any future changes in the prescribed rate.

Although there is nothing urgent, yet, the two consecutive increases in the bank rate should at least suggest that an increase in the prescribed rate is possible. If it happens, it will be effective January 1st, 2018, and the rate will be announced, typically, in early December.

So, this is just a heads up, especially when other forms of income splitting may be shut down.

-Chuck


52 views

Recent Posts

See All
bottom of page