Loans from a higher income family member to a lower income family member can be an effective approach to enable income splitting. Lower income family members often include spouses, minor children, or grandchildren.
This planning technique generally requires a loan to bear interest at no less than CRA’s prescribed rate at the time it is advanced. The lower income family member can then invest the amounts received, earn income on it, and pay tax at their lower marginal tax rate. Interest must be paid on the loan (by a particular date) between the family members or the strategy will not work.
The prescribed rate will remain at 1% until at least June 30, 2015.
Action Item: Proper execution of this type of strategy requires careful planning – contact us if you wish to investigate.