May 2022: Starting July 1st, 2022, the interest rate for intra-family loans increased from 1% to 2%. This rate is increasing again October 1st, 2022 to 3%. Depending on your situation, intra-family loans can help to reduce the overall family tax bill through a straightforward income splitting strategy. Income splitting involves the transfer of income from a high-income earner to a family member in a lower tax bracket. The lower income individual is taxed at a lower marginal tax rate and the family pays less tax overall. Canada Revenue Agency (CRA) restricts most forms of income splitting. An individual in a higher marginal tax rate can’t simply give their spouse $100,000 to invest and have the spouse declare the investment income at their lower marginal tax rate. In such a situation, the investment income would be attributed back to the original individual and taxed at their higher marginal rate. There are, however, a few legitimate and effective ways to split taxable income with a spouse or other family members through an investment loan. This can make sense if the investment returns are higher than the interest charged on the loan. You need a properly constructed demand promissory note, and both parties must either pay or declare the loan interest each year. Be sure to get professional advice first.
family loan interest rate
by Heidi Pullem | Jul 25, 2022 | Tips