Little know strategy to help income split using a non-arms length loan made at the prescribed rate.

1. Income splitting to
reduce your tax bite
 A tax planning opportunity to income split
with family members
Until March 31, 2012

2. This Presentation
 Is provided by Investors Group Financial Services Inc. (in
Quebec, a financial services firm).
 Is provided by Investors Group Securities Inc. (in Quebec, firm
in financial planning).
 Is specifically written and published by Investors Group and
intended as a general source of information only, and is not
intended as a solicitation to buy or sell specific investments,
nor is it intended to provide legal advice. Clients should
discuss their situation with their Investors Group Consultant
for advice based on their specific circumstances.
 Although we have tried to ensure the accuracy of this
information, tax laws change frequently so the provisions and
exemptions mentioned in this presentation may change.
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3. Tax Planning 101
Transferring investment income from a high income
family member to a lower income family member will
result in tax savings to the family overall.
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4. Background
 Gifts and interest free loans to non-arms length
persons are subject to the income attribution rules.
 Opportunity! - Attribution rules do not apply to
non-arms length loans made at the “prescribed”
rate.
 The prescribed rate for the 1st quarter of 2012 is a
low 1% January 1, 2012 to March 31, 2012
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5. Background
 The prescribed rate is set each quarter
 Based on the average yield of a Government of
Canada 90 day treasury bill sold during the first
month of the previous quarter.
 Current 1% rate is based on yield during October,
2011
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6. Planning Opportunity
Demand Loan
High Income Low Income
Family Member Family Member
Annual Interest @ 1%
Investment
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7. Procedure
 High income family member(H) makes loan to low
income family member(L) at an annual interest rate
of 1%
 L uses the loan proceeds to acquire investments
which have an expectation of earning investment
income
 L pays H interest at rate of 1% by January 30th of
the following year.
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8. Results
 H must include the 1% interest in income in the
year of receipt.
 For example, if investment earns 7% H has reduced
taxable income by 6%
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9. Results
 L claims an interest deduction of 1%
 Return on investment (ie. interest, dividends,
capital gains) reported by L.
 Income splitting is accomplished to the extent that
income from the investments exceeds 1%
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10. Limited Time Opportunity
 1% rate applies for the duration of the loan even if
the prescribed rate rises in the future
 Therefore if loan is made before March 31, 2012
you lock in the preferential rate of 1% until the
loan is paid off
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11. Conditions
 Interest must be paid by January 30th of the year
following or attribution rules apply
 No requirement to issue T5 slips for interest paid
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12. Requirements of the Loan
 Must be written and signed by lender (H) and
borrower (L) and preferably witnessed
 Must specify the interest rate
 Wording must be clear that it is a loan (ie.
Borrower (L) is legally obligated to repay lender
principal, plus interest)
 A demand loan with no specified repayment
requirement provides most flexibility
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13. Candidates for Strategy
 Where family members are operating as a single
economic unit. (ie. significant trust and the desire
to benefit each other)
 Discrepancy between marginal tax rates of family
members
 Significant funds available to invest (ex. high
income executive with stay at home spouse)
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14. Not Suitable for
 A leveraging strategy
 Shifting capital gains among family members other
than spouses (no attribution on capital gains on
loans to family members other than spouses.)
 Consider a 0% interest loan to trust for a child if
intended investment is equity.
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15. Cautions
 Ability of lender (H) to legally enforce repayment
may be limited due to marital property and
dependency relief legislation
 Status of loan uncertain if marriage/common law
breakdown or death occurs. Ensure consistency
with any marriage contracts or testamentary
provisions
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16. Cautions
 Loans to minors are generally unenforceable.
Consider making loan to inter vivos trust.
 Lender (H) must be prepared to accept risk of non-
recovery of loan if borrower (L) uncooperative.
Should be considered only where lender wishes to
benefit another family member.
 The spousal dependent claim by higher income
spouse will be reduced as income is created in
favor of the lower income spouse.
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17. Investment Choice
 Dividend tax credit may not be fully utilized if
spouse’s income is low and only dividends are
generated
 Spouse must have sufficient income each year to
offset interest expense
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18. What are the Benefits?
 Tax benefits will vary depending on:
 Marginal tax rates of lender (H) and borrower (L)
 Relationship between lender (H) and borrower (L) (i.e. spouse
versus child)
 Amount of income transferred from lender (H) to borrower (L)
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19. Example at 4%
STATUS QUO SPOUSE
Amount Invested $50,000 2% 2%
Return - Interest 1% 1%
- dividends 1% 1%
- capital gains 3% 3%
- deferred gains 7% 7%
Marginal tax Rate 46% 25%
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20. Benefit
LOAN TO
NO LOAN LOW INCOME DIFFERENCE
SPOUSE
After tax value:
After 5 years $ 63,550 $ 64,563 $ 1,013
After 10 years $ 81,294 $ 84,509 $ 3,215
After 15 years $ 104,532 $ 111,797 $ 7,265
After 20 years $ 134,961 $ 149,095 $ 14,134
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21. Compound Benefit
 In the example, the spouse (L) has $99,095 after
repayment of the loan in his/her own name after
20 years
 Compound return on this sum is not subject to
attribution
The rate of return or mathematical table shown is used only to illustrate the effects of the compound growth rate
and is not intended to reflect future values or returns on investment.
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22. How to Maximize Benefit
 Larger the loan the larger the benefit
 Invest family’s fixed income portion of portfolio in
name of spouse
 As interest rates and market rises... benefit
increases.
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C3149 12/2012-W)