Your family’s overall income tax bill can be reduced through the effective use of income splitting strategies such as the Spousal Loan Strategy, a prescribed rate loan to an RBC Family Trust, Spousal RRSPs and pension income splitting.
A common investment income-splitting strategy with a low-income spouse, whether you own a corporation or not, is the prescribed rate loan strategy. With this strategy, the high-income spouse loans capital to the low-income spouse for investment at the CRA-prescribed interest rate in effect at that time. In this case, all future investment income is taxed to the low-income spouse. However, the high-income spouse must declare the interest on the loan.
Gifting funds to minor children and earning capital gains on the funds is still an effective income-splitting strategy that many high-income parents with low-income children should consider. A child with no other income can earn approximately $18,000 of capital gains every year tax-free (varies by province) due to their basic exemption. The capital gain income can then be used for various expenses for the child’s benefit such as private school, camps and lessons.
If you are concerned about gifting monies to your child, then consider loaning the funds to a family trust at the CRA-prescribed interest rate. When properly structured, your children can earn up to $9,000 in interest income, or $18,000 in realized capital gains and even more in eligible Canadian dividends on a tax-free basis (varies by province). With the CRA-prescribed interest rate at lower levels, these tax savings would greatly outweigh the tax on the interest paid to you on the loan.
This article is supplied by Angelo D’Amico, a Vice President, Portfolio Manager with RBC Dominion Securities Inc. Member CIPF. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Angelo D’Amico can be reached at 514-878-5196.