Tax Brief: Prescribed Rate Loans

In Canada, taxpayers pay tax based on progressive tax rates. In the past years, the Canada Revenue Agency (“CRA”) has been very effective in closing family tax planning opportunities, which had previously enabled taxpayers with significant tax savings. However, given the COVID-19 economic impact on interest rates, a unique tax-planning opportunity has resulted, which may yield you significant tax savings.

As interest rates have fallen, the CRA’s prescribe interest rate for the period of July 1, 2020 – September 30, 2020, was set at 1%. Our firm is busy working with clients to take advantage of this temporary low-rate opportunity. Via a prescribed rate loan to a family member at lower tax brackets, income from the higher earners can be shifted to those at the lower levels. Furthermore, the 1% rate can be locked in at that very same rate, for the lifetime of the loan. Clients are now looking at potentially thousands of dollars in tax savings per year.

Example - $11,000 in tax savings:

A married couple will be using a prescribe rate loan and are looking at nearly $11,000 in tax savings. Via a prescribe rate loan on dividend income investments, they will now have an extra $11,000 to spend on their own personal goals and dreams.

Prescribed rate loans must be executed carefully, to avoid attribution rules. They should not be attempted to be executed without a qualified tax/accounting team. The time to act is now, as this 1% rate opportunity may not last beyond September 2020.

What will you spend you tax savings on?

Questions in how the above matter may relate to you? Reach out to Blumenfeld Woznica & Co to see how this matter may impact your specific accounting and/or tax situation.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as account/tax opinion or advice.

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