Canada’s interest rates have recently hit new lows.  With that comes an interesting side effect.  The Canada Revenue Agency’s prescribed rate drops.  These prescribed rates are tied to Treasury Bills, with 1% as the lowest prescribed rate possible.  In April 2018 it was set at 2% but for the third quarter of 2020, the prescribed rate will drop to 1%.  This will represent a significant opportunity for couples and families to income split.

This is a tactic that lets the spouse with the higher income reduce their taxable income for the CRA.  If both parties are in the same tax bracket, this won’t help them.  Nor is it beneficial for single parent families.  But for folks with disparate incomes, it is a boon.  It is a possible benefit for those who are interested in pension splitting if it either establishes a pension tax credit for the spouse or increases a current one.

Pension Splitting – Money is not actually transferred from one person to another.  It is just an accounting method of allocating income on the tax return.

Dividend Income – If the taxpayer is entitled to a spousal tax credit, all those dividends may be shifted to the spouse (or common law partner).  However, this is an all or nothing; no partial transfers allowed.

Capital Losses – Under the superficial loss rules, the capital losses can be moved to the spouse by having that person purchase the shares.  However, there is a window of 30 days on either side of the transaction.  The loss amount increases the cost basis of the investment and the spouse must retain the shares for over 30 days after the disposition.

Money Lending – The person in a higher tax bracket may loan money to the spouse or even a child.  The lent money can then be used to purchase investments and that income will be allocated to the lower bracket individual.  There are regulations about interest payments and arms’-length transactions. 

Employing Family Members – This is only for those who are self employed, but you can hire your spouse or children, pay them a reasonable wage and reap the benefits in tax splitting. 

As you can tell, there are some real opportunities here.  However, there are also many technicalities involved in saving tax dollars.  It is always best to consult an accountant to be sure you are following all of the rules and your attempts will not be disallowed. 

Contact your Accountants today click on this link —> https://capexcpa.com/contact

- The Capex Team