Dear Clients and Friends,
With the Bank of Canada increasing the prescribed rate of interest to 3% on October 1, 2022, we would like to remind our clients of the opportunity to take advantage of Canada Revenue Agency’s (CRA) current prescribed rate of 2%.
What does this mean for you?
Up until September 30th, 2022, the prescribed rate will remain at 2%, providing a significant opportunity to split income with a spouse or common-law partner, (grand)children or other family members. You can use the prescribed rate to your advantage, either by making a loan directly to family members at the prescribed rate or, where minors are involved, using a family trust to do so. For loans put into place before the next prescribed rate increase, the 2% rate would be locked in for the duration of the loan (without being affected by any future increases).
How does it work?
- An individual who is taxed at the top marginal tax bracket in Ontario sets up a family trust with specified beneficiaries. The beneficiaries are low-income earners and are not subject to high marginal tax rates in Ontario.
- The individual loans money to the family trust at the current prescribed rate of 2%. The trust pays interest at this rate and locks it in prior to Bank of Canada implementing rate increases. The prescribed rate is updated every quarter.
- The money loaned to the trust is invested, resulting in income generation that can then be distributed to the beneficiaries of the trust.
Given that our tax system has graduated tax brackets, by having the income taxed in the lower-income earner’s hands, the overall tax paid by the family may be reduced. Additionally, the income generated that is distributed to the beneficiaries can be used to help fund the expenses of minor children, such as paying for schooling, extracurricular activities, and clothing. This is generally achieved by making a prescribed rate loan to a family trust which has the minor children as beneficiaries.
How can we help you benefit?
Clearhouse LLP will provide you with advice on income splitting opportunities, as well as setting up your family trust to allow you to lend money while locking in the current prescribed rate before the government implements rate increases.
Please do not hesitate to contact us at info@clearhouse.ca or (647) 969 7382 if you have any questions.
Kindest Regards,
Your Clearhouse LLP Team