Special attribution rules prevent the shifting of income
between certain related people (including a spouse, parent,
grandparent, sibling, uncle or aunt). Consider the situation
where high-earning Spouse A gives investments to low-
earning Spouse B so that investment income can be taxed at
Spouse B’s lower tax rate. The attribution rules prevent this
by requiring the earnings to be taxed in the hands of the
transferor, Spouse A. However, these rules do not apply
where the low-income person pays fair market value for the
capital received. One way to pay for such investment capital
is with properly structured loans, commonly referred to as
“loans for value”.
The loan must satisfy several conditions to facilitate income
– the loan must bear interest;
– the interest must be at a rate no
lower than the CRA prescribed
rate at the date the loan is
– the interest for every year must
be paid no later than January
30 of the following year.
Missing a single interest payment invalidates the loan for
the year in respect of which the interest accrued and all
subsequent years. For example, interest for 2019 was
required to be paid by January 30, 2020. If the interest was not paid, attribution would apply for 2019 and all subsequent
The borrower (commonly a trust for minor children or
grandchildren) can then invest the borrowed funds and earn
income. Because the borrowed funds are used to earn
income, the borrower is entitled to deduct the interest
incurred as a carrying charge. To the extent the return on
their investments exceeds the interest, the difference will be
taxable to the lower-income borrower.
This planning tool is of particular interest now as CRA’s
prescribed interest rate declined to 1% (from 2%), as of
July 1, 2020.
CRA has confirmed that the interest rate can be fixed at the
time the loan is advanced, without further adjustment
when the prescribed rate changes. However, where a pre-
existing loan requires higher interest (such as the 2%
rate in effect to June 30, 2020), the rate cannot be
adjusted downwards as it is also locked in at initial
advance. Where there is an existing loan at 2% (or higher),
refinancing at the lower 1% rate would require that the
borrower repay the original loan. A new loan could then
be advanced at 1% interest. Where appreciated assets
must be transferred or sold to repay the loan, accrued
gains would need to be reported.
ACTION ITEM: Consider setting up a loan for value if
there is significant investment capital available, and a
family member at a lower marginal tax rate.
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