The deadline for paying Interest on family income splitting loans only days away.
Borrowers must pay interest on family income splitting loans for 2017 to lenders by January 30, 2018, 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 net 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.
For more information, contact your KPMG adviser.
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