Loan Income Splitting Tax Planning

Income Splitting Tax Planning – Window Closing On Low Rate Loans

 

The federal prescribed interest rate for income tax for the fourth quarter of 2013 will increase to 2%. As the rate is presently 1%, a tax planning opportunity exists provided all planning is in place prior to October 1,2013. If a higher income spouse lends funds to a lower-income spouse and charges the prescribed interest rate throughout the period in which the loan is outstanding, all income and capital gains, net of the interest paid, is taxed in the hands of the lower income spouse. The higher income spouse who made the loan would only include interest based on the prescribed interest rate at the time of advancing the loan. A written loan agreement should be entered into between the spouses which provides that the interest on the loan be paid no later than January 30th of each year, and the interest should in fact be paid. Furthermore, any loans that may have been entered into previously at a higher rate should be repaid and a new written loan agreement entered into. The loan technique can be used post 2013 but the interest rate will be higher.