Last week the Canada Revenue Agency announced that its prescribed interest rate would remain at one per cent until the end of the year. This means that a popular income splitting strategy can still be put into place until at least Dec. 31, allowing you to benefit from this historical low rate for years to come — even when rates go up.
The strategy involves loaning money to a spouse, partner (or even your kids, as we’ll see later), to split investment income and to get around the attribution rules, which are designed to prevent most attempts at income splitting among family members. Basically, the rules say that if you give your spouse or partner money to invest, any income, dividends or capital gains earned from the money so invested is attributed back to you and taxed in your hands.
But the Income Tax Act contains an exception to the rule, saying that instead of “giving” your spouse the money you loan it to him or her. Provided you charge the prescribed interest rate, any income or gains you earn above that rate can be taxed in the other spouse’s hands.
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