A once in a lifetime opportunity to pay less tax – and do more for your family
CRA sets prescribed loan rate at 1% - the lowest it has ever been.
The current low interest rate environment has created a simple income-splitting opportunity that could save you thousands of tax dollars -- and provide a better way for you to fund your family’s aspirations. Like education, travel, business investment etc.
Here’s how it works:
A high income earning individual, may loan funds for investment to a family member with no or little income – such as a spouse, child or grandchild. Under the arrangement, Canada Revenue Agency stipulates the borrowing family member must pay a prescribed interest rate of 1% annually on the loan amount. Income and capital gains earned on the loaned funds are then taxed in the hands of the lower-tax rate family member – thus reducing the total family tax bill.
The savings can be significant. To illustrate, an individual who loans $500,000 at the current prescribed interest rate of 1% for 15 years and earns 6% per year on the invested money saves over $200,000 in tax over the life of the loan. Loans can be made directly or indirectly through a trust, so the funds may remain under your discretion.
As part of this strategy, the funds can be invested in, say, a high yielding corporate bond portfolio that currently offers excellent yields well over the 1% rate on the loan. Newport Partners has three bond managers who have impressive track records in managing fixed income securities.
This is a simple, low-risk strategy that offers all kinds of possibilities to more efficiently fund your family’s activities. For example, many of our clients are using it to fund private school and post secondary education; help their children finance a new home or business; or simply transfer a portion of their wealth under a more tax efficient structure.
Currently, the prescribed loan rate of 1% is the lowest it has ever been and could change on September 30, 2010.
Interest payment terms and other loan arrangements also need to be properly structured under the agreement. We have helped many clients implement this strategy and we would be pleased to do the same for you. To take advantage, email David Lloyd or call 416-867-8573 for more information on this tax savings opportunity.
