Prescribed rate: no adjustment for old loans

So between 1eh July and 30 September, the prescribed interest rate loan was increased from 1% to 2%. He again got a percentage point of 1eh last October to 3% in the fourth quarter of 2022.

Many advisers then wondered if this meant that loans between spouses made at the prescribed rate would then increase their applied interest rate, Hélène Marquis pointed out at the conference. Simple answer: no.

“The interest rate applicable at the time the loan is granted remains in effect throughout the term of the loan, provided no novation takes place”, says Hélène Marquis.

In order for the prescribed interest loan to continue to be valid, its terms must of course be complied with. In particular, “the interest amount must be paid no later than 30 days after the end of the previous tax year, that is, on 30 January of the following year and all subsequent years, as long as the loan is in force. (Par.74.5(2) ITA)”, one can read there.

The interest paid must be included in the lender’s taxable income and can be deducted from the borrower’s, provided that this amount was used to earn business or property income, the document from Hélène Marquis specifies.

STILL USEFUL STRATEGY

Depending on the client’s situation, there is still significant opportunity for income sharing with a spouse, common-law partner, children, grandchildren or other family members, noted Jamie Golombek, managing director, tax planning and management, CIBC Private Wealth, last May.

“Income sharing involves transferring part of the income of a family member with a higher income to a family member with a lower income. Since the Canadian tax system is progressive in nature, transferring income to the person who is in a lower tax bracket can reduce the tax burden on the family,” reads the text.

To achieve this strategy, fixed rate loans can be used to help finance minor children’s expenses, such as fees associated with private schooling and leisure activities, by creating a fixed rate loan with a family trust and designating the minor children as beneficiaries.

“The allocation rules contained in the Income Tax Act prevent certain forms of income splitting as they usually require that any income or gain from funds transferred or given to a family member must be “attributed” to the transferor. Having said that, the tax law on income provides an exception to this rule where funds are loaned, rather than given, at the prescribed interest rate in effect when the loan was originally made, and interest is paid annually within 30 days of the end of the year. , we read in the note from Jamie Golombek.

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