The rate of interest on spousal or family loans will be returning to 1%, starting Jan. 1, 2014, down from 2%, where the rate had been since October 1. Canadians may use spousal loans as a strategy to reduce their overall family tax bill by achieving income splitting.
The prescribed rate of interest is re-set at the beginning of each calendar quarter, and is determined by using the average rate on 90-day Government of Canada T-bills for the first month of the previous quarter, rounded up to the next whole number.
In a typical spousal rate loan strategy, the higher-income spouse loans funds to the lower-income spouse, charging interest on that loan at the prescribed rate, thereby not running afoul of the attribution rules. The lower-income spouse invests the loaned funds with the expectation of producing returns above the prescribed rate. Those returns would be included in the lower-income spouse’s income for the year, which would likely be taxed at a relatively lower rate. The higher-income spouse would only need to include the interest on the loan as income.
The prescribed rate loan fell to 1%, the lowest rate at which it can be set, in April 2009 and remained there until October 1 of this year, when it moved up to 2%.