Tax Planning Opportunity

All tax planning follows simple ideas. Implementation can be messy though. This one has a time deadline, so if applies to you get busy soon.

The quick-overview includes:

Deduct – find an expense you can deduct from your income.

Defer – Find a way to pay tax later. If you live in a 5% world and you could defer tax for 30 years, a dollar you owe then costs just 25 cents present value.

Divide – if one person earns $150,000 they pay $45,000 in income tax. If a couple each earn $75,000, their tax bill is $15,000 lower. just $30,000.

There are other approaches but they’re more complex.

So just give your spouse some bonds, mortgages, stocks, or whatever. Easy division of income. That could work, except for the attribution rules. If you transfer income-producing assets to your spouse, they deem the income to be yours for tax purposes..

There is a way nonetheless.

Dividing investment income by loaning money to a spouse

Assuming there are no other things to be considered, dividing income makes sense. However, you cannot just change the name on the securities. The straightforward solution is to make a loan to your spouse, charge interest on it, and let the spouse invest from there. They would of course be required to pay interest on that loan, each year by January 30th of the following calendar year. There must be evidence that it was done.

The amount paid is income to the lender and deductible by the borrower against investment income earned.

The question is what is the correct interest rate to charge? Fortunately, the government tells you the correct rate to charge. Today and for the next 60 days or so it is 1% annually, locked in forever once you create the instrument of debt.

Why hurry?

The government’s interest rate is by formula and adjusted quarterly. The formula rate is the interest rate on 3-month treasury bills auctioned in the first month of the previous quarter, So come July the rate will increase from 1% to 2%. Given the current predictions for interest rates, it will probably be higher still come October.

The arrangements are easy enough, yet formal too. They can generate significant savings. Pay more than the normal attention if one of the partners is subject to the OAS Clawback. The saving would be larger still.

The bits to take away

The transaction is quite simple and it is easy enough to implement. Just be sure it is documented and the interest is paid each year.

Once the loan is established the rate does not change.

If you make more loans later to come to equalization, the new loans will be at the prevailing rate when they are made.

There are a few technical issues if you are transferring a portfolio. Seek help from a tax advisor.

This is not legal or tax advice, merely a notice to check. I am an advisor, but I am not your advisor. Always be sure structures like this match your situation.


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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

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