Individuals are generally not allowed to "income
split" by transferring money or other income-earning property
to a spouse, common-law partner or child who would be taxed at
a lower tax rate on the income earned from the property. The
attribution rules in the IncomeTax Act (Canada)
(the "Act") prevent income splitting by taxing the income
earned on the transferred property in the hands of the
transferor.1 However, the attribution rules currently do
not apply to individuals who lend money to their spouse, common-law
partner or minor children (including a family trust set up for the
benefit of these people) if the loan is made under a written
agreement that sets out the repayment terms and stipulates an
interest rate that is at least equal to the prescribed interest
rate in effect under the Act at the time the loan is made. There is
no maximum limit on the term of the loan, but the borrower must
pay interest at the stipulated rate on the outstanding loan
by January 30 of each year following the year in which the loan was
entered into and remains outstanding, or else the attribution rules
What is the benefit of prescribed rate loan planning for
These loan arrangements, if set up correctly, can produce
significant long-term tax savings for families. Although the lender
is taxed on interest income earned on the loan at the prescribed
interest rate each year the loan remains outstanding, any
investment income earned annually by the borrower on the loaned
funds that exceeds the prescribed interest rate will be taxed at a
lower tax rate than the rate at which it would have been taxed if
it had been earned by the lender instead of the borrower. Further,
the interest payments are generally deductible to the borrower,
provided the loan proceeds are used for the purpose of producing
income (e.g., income from investments) that is not exempt from
What is the benefit of prescribed rate home purchase loan
planning for employees?
If an employer makes a loan to an employee, the employee is
generally required to include in income for each year the loan is
outstanding an employment benefit equal to the prescribed rate of
interest in effect during that time on the amount outstanding under
the loan. However, a special rule provides that for the
purpose of determining the taxable benefit on an employee home
purchase loan, the applicable rate of interest for the first five
years of the loan is instead the prescribed rate of interest in
effect at the time that the loan was received by the employee.
What is changing?
The current 1% prescribed rate of interest under the Act, which
has been at an all-time low since April 1, 2009, is expected to
double to 2% on October 1, 2013.
What can you do?
Lock in the 1% prescribed rate on family loan arrangements by
ensuring your loan arrangements are finalized at the latest by
September 30, 2013.
How can we help?
To learn more about how these loan arrangements may benefit you,
and how to lock in the 1% prescribed rate before October 1,
2013, please contact a member of BLG's Tax Group.
1. In the case of a transfer of property to a spouse
or common-law partner (but not to a child), taxable capital gains
arising from the disposition of the transferred property are also
usually attributed back to the transferor for tax
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