Income Splitting Through loans to your family members?

A common income splitting tactic is for a higher income earning spouse to provide for a loan to a lower income earning spouse or adult children.  The lower income earning spouse or adult child then makes an investment and earns income, which is taxed at lower rates than that of the high income earning spouse.

To ensure that there is no attribution of income tax, amongst other requirements, the loan must bear interest at the prescribed rate at the time the loan was made. The prescribed interest rate is set quarterly and can be found at:

http://www.cra-arc.gc.ca/interestrates/

The key issue that must not be overlooked as the interest on the loan must be paid no later than 30 days after the end of the calendar year, in order to avoid attribution on the income.  Therefore, for the 2015 personal tax year, the interest must be paid by January 30, 2016.

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