DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Friends in Low Places

In Canadian Income Tax, Personal Tax on September 13, 2009 at 11:08 pm

CRA prescribed interest rates were announced this week and, for the third quarter in a row, they have been pegged at a very slim 1%. What better time to pull out a couple of tried and true income splitting strategies designed to take advantage of these rates.

Strategy #1 – Loan To Spouse

Whenever prescribed rates dip, tax planners suggest this strategy, but with rates this low, I’m not just suggesting, I’m urging. If you have investments earning income on which you are paying tax at high marginal rates, and your spouse pays tax at lower rates, this strategy is for you. Making a gift of funds to your spouse to have him earn the investment income might sound like a good idea, but, of course, this would trigger the income attribution rules. Essentially, the income earned by your spouse would be attributed back to you and taxed in your hands.

A bona fide loan to your spouse would not create the same attribution problem; but it is subject to other restrictions. Essentially, you must charge interest on a loan to your spouse at the prescribed rate in effect at the time the loan was made. Any income earned by your spouse over and above this rate will be taxed at his lower rate.

With prescribed interest  rates at 1%, and equity investments moving up, this strategy has never been more attractive.

Strategy #2 – Corporate Freeze

If you are a business owner and you’ve been contemplating allotting shares of the business to your spouse or minor child, the time is now.

If you shares have a value, you cannot simply issue new shares to your family members without triggering tax. The normal course of action would be to freeze the value of your shares and issuing new common shares in the desired proportions. This will generally trigger the “corporate attribution” rules. Essentially, the company would have to pay you an annual dividend based on the value of your shares at the time of the freeze. What’s the rate of the dividend? That’s right – the prescribed rate. So a corporate estate freeze should now be considered for anyone who has a company with value and wants to bring family members into the fold.

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