A key Canada Revenue Agency tax rate that impacts everything from the interest due on outstanding taxes to interest received on tax refunds, is about to double. The prescribed rate will increase to 2 per cent from the current 1 per cent, effective July 1st, 2022. The rate has remained at 1 per cent since July 1st, 2020.
The prescribed rate is also used to determine the interest rate charged on:
- Canada Pension plan contributions and Employment Insurance premiums
- Corporate taxpayer overpayments
- Non-corporate taxpayer overpayments
- Corporate taxpayer’s pertinent loans or indebtedness
The prescribed rate can have a substantial impact on an individual or corporation’s tax liability when a balance is owing to CRA. The rate can also be significant from a tax-planning perspective, such as when a family member in the top tax bracket lends money to a minor child, spouse or common-law partner in a lower tax bracket for investment purposes.
While the planning strategy is fully permissible under Canadian tax law in specific circumstances, the loans must be made with interest, the minimum of which is the Canada Revenue Agency’s prescribed rate. The tactic can enable families to split income, bypassing normal attribution rules that would require income or capital gains earned on the transfer of property or assets (such as cash or shares) to be applied to the income of the family member who has made the property transfer (e.g., a parent gifting equities to their child).
If the property is loaned at the prescribed rate, however, families can earn investment income and attribute the income/gains to the family member in the lower tax bracket to whom the loan was made. If such a loan is properly structured and executed before the June 30th, 2022, deadline, it has the potential to significantly reduce the tax that a family would pay on investment income over the lifespan of the loan.
Speak to a member of our team now to determine how the prescribed rate increase impacts your personal and/or professional finances.
Armando Iannuzzi, Co-Managing Partner
For other tax-planning assistance, contact a member of our team.