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  • Charles Rotenberg


First, the good news

Many of you have read my numerous articles over the years concerning income splitting using low interest prescribed rate loans. My latest offering on this subject was in January of this year.

Well, here’s the good news.

Since 2009, with some exceptions, the prescribed rate for inter family loans and certain other benefits, has been 1%.

In the second quarter of 2018, the rate doubled to 2%. It may not sound like much, but if the loan is substantial, so is the change in interest.

As of July 1, 2020, the prescribed rate is again dropping to 1%, opening up room for more income splitting among family members.

BUT if you have loans outstanding at 2%, it isn’t as simple as just changing the interest rate. It must be a new loan.

This could mean liquidating all or a portion of a portfolio to repay the previous loan, or taking other steps to ensure that the new loan @ 1% is truly treated by the CRA as a new loan.

This is not something that should be undertaken without proper tax advice.

Now, the (potentially) bad news

For the last few years, every time we approached the time of the Federal Budget, people been speculating about a possible increase in the capital gains inclusion rate. Currently, only 50% of a capital gain is taxable. It hasn’t always been so. Taxes on capital gains did not exist in Canada until 1972. This table shows the time periods and relevant capital gains inclusion rates:

In recent years, I have been the naysayer concerning an increase in the inclusion rate. but now the Government will be desperate for money – in a way that we haven’t seen before.

As we saw with Trudeau’s 2017 attack on small business, the middle class is right in the cross hairs.

We didn’t have a Federal Budget this year due to the pandemic, but we usually have an Economic Statement around October, and any proposed tax changes could be introduced then.

Trudeau has a minority government, but we must assume that any increase in taxes for investors will be supported by the NDP.

With the markets down as a result of the pandemic, much as been written about selling investments with accrued losses, to take advantage of the deductions before, hopefully, a rebound in the markets.

The possibility of an increase in the inclusion rate raises some interesting questions for investors:

  • Should I trigger capital gains now, and pay the tax, in case there is an increase in the inclusion rate, even though it means triggering tax that I wouldn’t otherwise pay until some time in the future?

  • Should I trigger capital losses now in advance of, what we all hope will be, an upward movement of the capital markets, to take advantage of the losses?

  • Should I wait to trigger losses because, in cash terms, a loss that is 75% deductible is worth considerably more than a loss that is 50% deductible?

All of these questions, and more, are important and none should be answered without proper investment and tax advice.

I would be pleased to work with your accounting and investment advisors to ensure that you obtain the most benefit from the upcoming change in the prescribed rate, and the potential change in the capital gains inclusion rate.

I hope everyone is staying safe.

— Chuck


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