Another resolution for the New Year - take advantage of the low prescribed rate

We have talked about income splitting arrangements available to individuals who wish to loan funds to his/her lower income spouse or adult child, or in the case of minor children, a discretionary family trust. Such loans would be used to invest in income producing properties such as marketable securities, mutual funds, real estate income trusts (to name a few). The income from these properties less the interest paid on the loans would be claimed by the spouse, beneficiaries of the trust, thereby providing tax savings to the family overall.

The loan(s) must carry the appropriate rate of interest (i.e. at least the prescribed rate of interest pursuant to the Income Tax Act) and the interest on the loan must be paid by a certain date every year.

The prescribed rate is based on the average 90-day Government of Canada T- Bill rate, for the 1st month of prior quarter. The Canada Revenue Agency (“CRA”) announces the rate for each quarter just prior to the start of the quarter. You can find this information by searching “prescribed rate” on CRA’s website at cra.gc.ca.

The rate as of January 1, 2019 is 2%. At the end of the last year, there was every expectation that interest rates in general were expected to be on the rise again soon (Bank of Canada rate, mortgage rates etc.) and with that we could expect a rise in 90 day Canadian Treasury Bills yield (“T Bill rate”) over the next couple of quarters.  As of time of writing, the 90 day T-Bill rate was hovering around 1.63%, a slight drop from the end of the 2018. So some will argue that the 2% prescribed rate will be around for a while but for how long?

In the meantime, conditions continue to be ideal to take advantage of the low prescribed rate – add it to your resolutions for 2019 but act sooner than later.

By the way, if you can, approach your employer for a low interest loan (to buy a house for instance). Your employer can charge you interest at the prescribed rate at the time of the loan and the rate of interest could be locked in for a full five years.

As featured on All About Estates Blog where Baker Tilly WM Partner, Steven Frye, is a regular contributor.