Payments must be made by January 30, 2019
If you have any family income splitting loans, you should make sure that the 2018 interest on these loans is paid to lenders by January 30, 2019 to avoid having the attribution rules apply to investment income earned on the borrowed funds.
The CRA's low prescribed interest rate offers an opportunity to enter into income splitting loan arrangements with family members (or a family trust).
For example, if a taxpayer's spouse is in a lower tax bracket, the higher income spouse can lend money to the lower income spouse to invest so that the investment income can be taxed in the lower income spouse's hands. To achieve this result, it is essential that the spouses have a written agreement that specifies the repayment terms and an interest rate at least equal to the CRA's prescribed rate at the time of the loan.
The lower income spouse must pay interest on the loan annually by January 30 of the following year (note that a loan created by unpaid interest is not a payment of interest). If the interest is not paid by the following January 30, the investment income from the borrowed funds will be taxed in the hands of the higher income spouse for that year and all future years.
Please note, the CRA's prescribed interest rate increased in Q2 2018 to 2% (from 1%, see TaxNewsFlash-Canada No. 2018-03, "Lock in Family Income-splitting Loans by March 31"). It will remain at this rate until at least March 31, 2019. Taxpayers who entered into family loans after March 31, 2018 and before April 1, 2019, will be subject to this 2% prescribed rate.
For more information, contact your KPMG adviser.
Information is current to January 08, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500