Tax Tip - Family loans at prescribed rates of interest – ensure interest is paid by January 30, 2019

November 15, 2018

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If you make an investment loan to your spouse, common-law partner, minor child or a family trust for them, the investment income from investing the loan proceeds will be taxed in your hands, rather than in the hands of the family member who received the loan, unless certain rules are followed.

If the loan bears interest at the prescribed interest rate in effect when the loan was made, these attribution rules will not apply, provided conditions are met. The prescribed rate is an interest rate set quarterly by the Canada Revenue Agency that approximates short-term Treasury bill rates. The rate is currently 2%, reflecting an increase made effective April 1, 2018, and will remain so for the rest of 2018. Previously, it had been 1% since 2006, with the exception of the fourth quarter of 2013.

One key point you must remember is that the interest on these loans must be paid at least annually, and by January 30 of the year following the year in which the interest accrued. Note that the interest must be paid on time each year that the loan is outstanding to avoid income attribution. Accordingly, now is the time to ensure that the interest that accrued on such loans in 2018 is paid by January 30, 2019 so that the tax benefit of these loans can be maintained. Your BDO tax advisor is ready to help.

This tax tip is a publication of BDO Canada 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 November 15, 2018.