Weekly Tax Tips
Income Split by Taking Advantage of Low Interest Rates
30 Apr 2009
With interest rates back down to historic lows, now is the time to make sure that you’re maximizing your benefits from income splitting. Income splitting involves redirecting income within your family group to take advantage of lower tax brackets, deductions and credits available to each family member. The total tax on your family’s income will be the lowest when each member earns approximately the same level of income.
If you make an investment loan to a spouse or a minor child, and charge interest on the loan at the “prescribed rate,” then the net income that they earn will not be subject to the attribution rules. Because of recent interest rate reductions, the prescribed rate for the second quarter of 2009 is only 1%. That means that if you loan money to your spouse or a child between April 1, 2009 and June 30, 2009 (and possibly beyond, provided the prescribed rate does not increase), and charge interest at 1%, they will be taxed on any income they earn on the funds (net of the interest expense) and you won’t be.
If you have already set up a prescribed rate loan, it is possible to unwind the original plan and re-loan funds to the low-income family member at the 1% rate. Keep in mind that there is more to this than simply reducing the interest rate on an outstanding prescribed rate loan to 1%, so consult with your BDO advisor before proceeding.
This is the time to ensure you have maximized the benefits of income splitting. Ask your BDO advisor for more information, and to recommend an income splitting plan that works for you!
Here’s a link to an article which discusses how income splitting and prescribed rate loans can reduce your taxes.
This tax tip is a publication of BDO Dunwoody LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 30 Apr 2009.
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