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 | Saving
Taxes by Incoming Splitting - Volume 9
by
David Chong Yen (April 2003) | | |
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Canada Customs and Revenue Agency (CCRA or
"tax department") announces its prescribed interest rates quarterly
for each calendar year. CCRA's prescribed interest rate for the 2nd quarter commencing
April 1, 2003 is 3%.
This is an opportunity for the richer spouse to lend
money to the poorer spouse at a rate of 3%. The poorer spouse can use the loan
proceeds for investment purposes. As long as the interest is paid by January 31
of each following year, the investment income earned will be taxed in the poorer
spouse's hands at the lower tax rate. Provided the poorer spouse can generate
an investment return greater than 3% annually, this will result in greater tax
savings to the family.
To take advantage of this opportunity, the loan
must commence in the calendar quarter ending June 30, 2003. The prescribed interest
rate (3%) remains fixed for the duration of the loan even if the prescribed interest
rate increases in future calendar quarters. Also, it is important to document
the loan to avoid ambiguity and CCRA's wrath.
Why is it important to charge
the prescribed interest rate? To avoid onerous attribution rules levied by CCRA.
In short, these attribution rules would specifically tax investment income in
the richer spouse's hands, and preclude the poorer spouse from claiming investment
income at a lower tax bracket in the following scenarios:
| a) | Investment
in name only: Poorer spouse's name is on the investment but the funds for the
investment came directly from the richer spouse. | | b) | Gifting
of funds: Richer spouse gives money (i.e. not a loan with prescribed interest
rate) to poorer spouse to buy investment. |
Paying
your spouse and kids for work done can save you significant taxes. Beware of some
of the traps. Consider the following:
| 1) | Prepare
a job description which details all of the tasks and responsibilities which they
undertake; | | 2) | Pay
family members in the same manner and frequency (i.e. by cheques issued biweekly,
etc.); | | 3) | Ensure
payroll deductions (taxes and CPP) are deducted and paid to Receiver General by
the 15th of the month following. Consider filing an appeal to have employment
insurance premiums waived due to the "family status," (i.e. Salaries
paid to family members are exempt from employment insurance premiums provided
an El appeal has been made and a successful ruling has been obtained. An appeal
can be filed to recover the last 3 years of unemployment insurance paid by both
the employee and employer); | | 4) | a
reasonable amount for services rendered. One should consider industry wage surveys. |
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