Tax Strategies That Will Save You Cash Today

Putting tax strategies into place could help you save money in today's economic environment.

When it comes to tax minimization, you should look into strategies that reduce not only your tax bill but also that of your family as a whole - one way of doing this is income splitting between family members.

Income splitting is shifting income from a high-income tax rate family member to another who will pay tax at a lower rate. Attribution rules of the Income Tax Act state that if you give a spouse funds for that person to invest, any income or capital gains generated on those funds will be taxed in the hands of the other spouse. Similar rules apply with respect to gifts to minors.

One way to steer clear of the attribution rules is by creating a loan between the spouses or a Family Trust at an interest rate equal to or greater than the CRA prescribed interest rate. The loan must be documented in writing.

Currently, the CRA prescribed interest rate is at the lowest possible rate of 1%, remaining as such until June 30, 2022. This represents an excellent planning opportunity to allow family members to income split. The net effect will be that any investment return generated above 1% will be taxed in the hands of the lower-income family member. It is the last chance to lock in this 1% rate, as starting in July, it is anticipated to go up to 2%.

Here is an example of how you can save money applying this tax strategy:

Assume Mrs. A is a successful business owner and is currently paying tax at the highest income tax rate, which in Ontario is 53.53%. On the other hand, Mr. A has no income.

Mrs. A currently has $1 million of investable assets, generating a 5% return on investment. The investment income of $50,000 is taxed at the top marginal rate for Mrs. A.

Mrs. A has decided to loan her near-cash investment assets to Mr. A. Note there may be capital gains/losses on any dispositions. A loan agreement is documented at the prescribed interest rate of 1%. Mr. A then goes ahead and invests the $1 million. At the end of the year, Mr. A generates $50,000 of investment income, assuming the same 5% rate of return. He would end up paying tax at his marginal income rate of under 20%, rather than the higher rate of 53.53%.

By January 30 of the following year, and every year the loan is outstanding, Mr. A must pay interest of 1% on the $1 million loan from Mrs. A ($10,000). Mrs. A will report this $10,000 as income on her personal income tax return, and Mr. A would be able to deduct this $10,000 as an interest expense on his return. Tax savings for the spouses could be over $20,000 for the first year, and available thereafter on an annual basis.?

Something to keep in mind is that the interest rate will be 1% for the life of the loan. The interest for each calendar year must be paid by January 30 of the following year. The Government sets the prescribed interest rates every 3 months, meaning the 1% rate will remain for at least to June 2022. Interest rates are increasing in Canada, and we are anticipating the prescribed rate will increase for the next quarter. So now is the time to act.

If you require assistance determining if this or any other type of tax planning strategy could benefit you, please contact us.

Shawn Rosenzweig - [email protected]?