My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 16, 2018

Confessions of a Tax Season Accountant - Determining the Adjusted Cost Base of Your U.S.Securities

Last week I received an avalanche of tax returns, as my clients finally received their T3 and T5013 tax slips (although many are now being amended). Driving to work to prepare all these returns was problematic, as the weather in Toronto was terrible. While snow in April is not what you hope for, the upside for an accountant is; my friends cannot call me on each hole of the golf course to torment me while I am working away doing tax returns. But I digress.

While preparing returns last week, I only found one noteworthy issue to discuss; that being the tracking of the adjusted cost base of U.S. stocks and securities. This issue rears its ugly head when filing terminal tax returns (the final return in the year of death) and for anyone who sells U.S. stocks and receives a capital gain/loss report solely in U.S. dollars.

What is the Adjusted Cost Basis of Your U.S. Securities? Your Guess is as Good as Mine

Unfortunately, over the past 15 months or so, I had a couple clients pass away. As discussed in this blog post, when you die, there is a deemed disposition of the capital property you own on death (unless you have a surviving spouse to whom you transfer your property under your will, although you can elect out of  this provision on a security by security basis). My issue has been obtaining the historical purchase dates of the U.S. stocks to determine the deemed disposition gain for these client's U.S. stock holdings.
For example. Say a client purchased IBM at $40 in their U.S. portfolio years ago when the exchange rate was say $1.05. The converted Canadian cost base is $42 ($40x1.05). Let’s assume the stock price upon the date of their death was $150. If the exchange rate on death is $1.30, the deemed proceeds are $195, and the capital gain should be $153 ($195-42).

However, in two cases where I had a client pass away, all I was provided with from the investment manager/institution was a U.S. cost base of $40 and a U.S. fair market value of $150. If I just convert both the $40 cost and $150 value at death at say $1.30, this would result in a capital gain of $143 instead of the correct $153. Where the U.S. stocks have been purchased with the current advisor, typically they can at least provide me with the purchase dates and sometimes they can run a new report with the converted $Cdn ACB. Where stocks were initially purchased by the client on their own or with another advisor, it is almost impossible to get the original purchase date unless the executor can find the original purchase documents.

The standard reasoning provided by reporting entities for not having this information is that the stocks were transferred to them and they don’t have the historical cost. I can live with that explanation, but query why when U.S. stocks are purchased by the manager or institution, they do not in many cases automatically track and convert to a $Cdn ACB? Another of life’s little tax mysteries.

Often I must play detective and try to somehow determine when these stocks were purchased which is either extremely time consuming or not possible given the lack of records.

Many of you may have this same issue if you have a U.S. stock portfolio with an investment advisor or financial institution and your yearly realized report is provided only in U.S. dollars. How do you know what your adjusted $Cdn cost base is? I suggest that in order to alleviate this problem, you ask your advisor to provide you on an annual basis with the $Cdn adjusted cost base of your U.S. stocks whether they have to push a button or have their assistant do it on a spreadsheet. You pay for this. If you are a DIY investor, you should ensure you note the foreign exchange date down for every U.S. or foreign stock purchase.

Long story short, this a significant reporting issue while you are alive and after you pass away.

Note: I am sorry, but I do not answer questions in late April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

This is my last post (although I may post a guest blog) for a couple weeks, so see you in May.


This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, April 9, 2018

Confessions of a Tax Season Accountant - Late T-slips and Reporting the Sale of Your Principal Residence

In today's tax season confession, I will provide an update on the required reporting when you sell your principal residence. I also include my annual rant, about the fact many of my clients must wait until late March or early April to receive their final T-slips.

Condensed Tax Season


Just to be consistent with the prior 7 years, I will again complain about the condensed nature of tax season. I receive about 65% of my clients returns after March 31st, causing a crazy April. The delay is typically caused by clients waiting for their T3 and T5013 tax slips (you would not believe the amount of emails and faxes I received last week with just arrived T3's and T5013's). I ponder why, with current technology, that all filing deadlines for T4’s, T5’s, T3’s and T5013’s cannot be moved up by 15-30 days, so everyone has adequate time to file their tax returns. I guess this is one of life’s little mysteries.

Principal Residence Exemption Rules


As discussed in this October 2016 blog post on the new Principal Residence (“PR”) reporting requirements, you must now report the sale of your PR (typically your house but can also be your cottage) on your tax return.

For 2016, you just had to report the sale on schedule 3, unless the gain was not fully exempt, in which case you had to file Form T2091 (IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). However, for 2017 and any future years, you must now file schedule 3 and Form T2091 in all cases.

If you designate your home/cottage as your PR for all the years you owned it on schedule 3 (box 1), other than the free plus 1 year, (you may recall the formula to determine the exempt portion on the sale of your PR is the capital gain on the sale of your PR, times the ratio of the number of years you have lived in your home [i.e. designated the home as your principal residence] plus 1, divided by the number of years you have owned the property) the form is fairly simple to complete. You just need to fill out the first page of the T2091 form. You will need to include the following information:

  • the year of acquisition of the property you sold
  • the proceeds of disposition 
  • the address of the property being designated as a principal residence 
  • the years you owned the property and are designating as your principal residence.

Penalty


There are stiff penalties for not filing the PR designation on time. New paragraph 220(3.21)(a.1) will allow for late-filed forms subject to certain time restrictions. The penalty will be the lesser of the following amounts:

  • $8,000; and
  • $100 for each complete month from the original due date of the relevant income tax return to the date that your request for a late-filed designation is made in a form satisfactory to the CRA.

The CRA says on their website that a penalty may apply where the PR election is late-filed. I would work on the assumption the penalty is applicable and you will need the CRA to be merciful to have the penalty removed.

It is also important to note that if you do not file the T2091 form, your return can be re-assessed at any time. This means the usual statue barred period of 3 years is not applicable and your return remains open until the end of time or three years from when your return is assessed, when you finally file the form.

If you sold your principal residence in 2017, simply put, complete schedule 3 and file Form T2091, or there may be punitive repercussions.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, April 2, 2018

Duplication of Investments

In August of 2011, I wrote a blog post about common investment errors I had observed in my capacity as an accountant who works in the wealth maximization and wealth advisory area. One of these errors was the duplication of investments. I find that many people have this issue to some extent; it is just a question of quantum. Today I want to briefly expand on this topic.

The duplication or triplication of investments, which can sometimes be intertwined with diworsification, occurs when investors own the same or similar stocks, mutual funds or Exchange Traded Funds (“ETFs”) in multiple places.

A simple example is Bell Canada. You may own Bell in your own “play portfolio,” in a mutual fund you own, in your investment advisors private managed fund or indirectly in an ETF fund. The same duplication often also occurs with many of the Canadian banks and larger cap Canadian stocks, such as TransCanada, Thomson Reuters, Enbridge, etc. Unless you are diligent, or your advisor monitors this duplication or triplication, you may have increased your risk/return trade-off by over-weighting in one or several stocks. Some may argue this is really just a redundancy issue, that likely results in higher costs and is not really that significant a risk to your portfolio. Although, I would suggest that if the redundancy is in a more volatile group such as the resource sector, the portfolio risk could be significant.

The investing reality in Canada is that there are only so many stocks in the Canadian stock universe that investment managers can select. This limitation plays a large part in this issue. Duplication can also result within a family unit. If your spouse or partner invests separately, they may be creating redundancies and additional costs, whereas if you invested as a family unit much of this duplication could be eliminated.

Asset Allocation


I think most of us are aware of the concept of asset allocation, which is essentially allocating/diversifying an investment portfolio across major asset classes (stocks, fixed income, foreign stocks, small caps, REITs, etc.). Typically, an effective asset allocation will also consider diversification across countries, which is important given Canada’s limited stock access as discussed above. Your asset allocation should be undertaken in context of your Investment Policy Statement which accounts for your risk tolerance, objectives and trading restraints (such as no stocks that sell arms or tobacco).

When you allocate and diversify your investments, you can typically, to some extent, minimize market risk and volatility. Where you have duplication, you are at cross-purposes with your asset allocation strategy, since you have doubled or tripled up on an asset class. Your goal is diversification with minimal investment duplication.

Tax Efficiency


When I meet or talk with investment managers (the better ones do this on their own volition) on my client’s behalf, I always ensure they have reviewed the tax efficiency of my client’s portfolio. This would include considering the type of income earned, typically interest, dividends, capital gains and would also likely account for their return of capital investments like REITs. This discussion is then tied back to whether an account is a registered account such as an RRSP, a tax-free account like a TFSA or a taxable non-registered account. I wrote about this in these blog posts on tax efficient investing, Part 1 and Part 2.

Where there is duplication, this tax-efficiency can be lost, especially where there are multiple advisors and there is no overall communication. This can be especially costly when tax-loss selling is undertaken in the fall and your advisors are at cross-purposes or thinking they are doing good by selling stocks underwater. You may end up with an excess of capital losses or not enough capital losses, and they all sell the same stock to trigger a loss, even if it is a good long-term investment.

Some Considerations to Avoid Duplication


If you use several investment managers, consider having one oversee the group to ensure each manager is investing in what they know best and there is minimal duplication and proper asset allocation. If you have significant wealth, you may want to or hire an independent person to quarterback the process such as your accountant or a fee for service financial planner.

You may also want to consider consolidating your investment assets. This can be done by reducing the number of investment managers you use (if you have several) or if you manage your own money, review the details of the funds and stocks you own and see if there is duplication of investments or a way to reduce your overall costs.

At the end of the day, your goal is to simplify the tracking of your investments, ensure you have managed your risk and have diversified your portfolio to minimize duplication.

The above in not intended to provide investment advice. Please speak to your investment advisor. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, March 26, 2018

Let Me Tell You - Quotes and Proverbs to Ponder

As noted in October, I am writing occasional blog posts under the title “Let Me Tell You” that delve into topics that may a bit more philosophical or life lessons as opposed to the usual tax and financial fare. Today, I discuss three of my favourite quotes and proverbs. I think these words of wisdom provide some insight into my psyche, but I will leave that for you to decide.

I have tried my best to attribute these sayings to the proper person; but regardless of whether I have the correct acknowledgement or not, the key is the message, not the messenger.

Make a Decision and Go with It!


I have discussed this quote once before, but I am bringing it back, since it is one of my favourites.

The quote as best I can tell is from a poem by S.H. Payer’s “Live Each Day to the Fullest”. It goes as follows:

"When you are faced with decision, make that decision as wisely as possible,  then forget it.
The moment of absolute certainty never arrives".

Think about that last line: “The moment of absolute certainty never arrives”. Whether a decision is personal or financial, it has been my experience that people can freeze in their tracks with indecision and are often unable to act on their issues, until they feel they have found that moment of certainty.

However, we all know that the moment of certainty very rarely identifies itself or if it does, it is likely not in a timely manner. This is why I love this quote; time constraints often force us to deal with an issue before there is certainty. People who make the best decisions, under the circumstances and move forward without regret or second-guessing themselves, are best equipped to solve and deal with life and its often confounding decisions.

We Are Not Immortal – Live Your Life to the Fullest While You Can (but save a few bucks for retirement)


In October of 2015, I wrote a blog post titled “Believe it or Not - We Are Not Immortal” in which I discussed how denying our mortality had a significant impact emotionally and financially upon our families. The take-away from this blog post was that you should provide your spouse and loved ones a financial roadmap so that they are prepared as best they can be, should you pass away.

In the comments to that post, one of my reader’s, Vernon L provided a quote that read:

“Man, he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the results being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

What a great quote! While it in part touches on our mortality, it has a wider breadth, in that it comments on how we live, or more accurately, how we often live improperly.

After reading the quote, I immediately googled it to determine who made such a perceptive comment on human behaviour. Initially, the quote appeared to be attributable to the Dali Lama. However, as I researched further, it appears the consensus is that it has been inaccurately credited to the Dali Lama and it should be attributed to John James Brown (pen name James Lachard) a writer and former CEO of World Vision Canada. So, while I am not 100% sure whom to attribute this quote to, let us just leave it at it is very sage advice.

This quote refers to money and the financial and health consequences of chasing the almighty dollar. But of course, enjoying your life and living in the present is not 100% correlated to money. We have family, religious and altruistic components of our lives that enrich and make our day to day living fulfilling (as discussed in this blog post I wrote).

I have written numerous times about having a bucket list and ensuring you cross items off your list during your working life. The longer we wait to undertake these bucket list items, the greater the chance we are not physically able to do them, or worse, not around to do them.

While this quote goes much deeper, we all need to live in the present and enjoy our lives and family, plan for retirement (where hopefully health and money permitting, you clean up your bucket list and make a new one), and always understand that you are very lucky for each day on this earth.

It is Never My Fault


Somebody sent me this quote/life lesson that was circulated on Facebook last year. I have no idea whom to attribute it to, but it very succinct and accurate in my opinion. It goes as follows:

Three Ways to Fail At Everything in Life:
  •  Blame all your problems on others 
  • Complain about everything 
  • Not be grateful

Craig Soroda who provides leadership training noted in this blog post that the above three points are known as blame, complain and defend (“BCD”). He provides a quote by well-known football Coach Urban Meyer that says “BCD has never solved a problem, achieved a goal, or improved a relationship. Stop wasting your time and energy on something that will never help you.”

Personally, I go back to the old school thoughts of my father. Dad always taught me that I must take responsibility for whatever I did, not to complain, and to never give up. I think being grateful just came from the way I was raised by my parents.

In brief, these quotes can be summed up as follows:

1. Life is fleeting, live it and enjoy it as best you can, but save a few bucks for retirement.

2. Don’t dither on decisions, make an educated decision and move on.

3. You are responsible for your own life, don’t blame others, it is counter-productive, and people don’t like whiners.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, March 19, 2018

CRA Information Requests – 2018 Update

In December 2016, I wrote a blog post titled CRA Information Requests - 2016 Update in which I discussed that corporate clients had been receiving information requests from the CRA to support their equipment (capital cost additions) and/or had received information requests to support professional fees that had been claimed.

On the personal side, I noted that taxpayers were receiving information requests to provide support for Interest deduction expense claims, foreign tax credit claims and matching income requests.

Today, I provide a quick update on what I am seeing.

Beware if You are Receiving or Paying Management Fees


Lately, I have seen the CRA issue information requests to support management fees paid. The requests appear to relate more specifically to intercompany management fees, but these requests can directly or indirectly lead to information about management fees paid to owner-managers.

As detailed in this guest post by Howard Kazdan last year on Management Fees, it is important to have proper support for the payment of these fees. This support is often lacking for both intercompany payments and payments to shareholders who consider themselves independent contractors.

It should be noted that management fees paid to owner-managers as independent contractors can be problematic in the first place, as detailed in this 2015 blog post.

The CRA information requests essentially ask for all the information Howard suggested you document or maintain in his blog post, including some of the following:

1. The name and Business or SIN# of the corporation or individual receiving the management or administration fees

2. If the fee was paid to a related party

3. Copy of the contract for services

4. Description of the services provided and log if available

5. Invoices for the services provided

I would suggest many corporations and shareholders have been lax in ensuring there is proper documentation and that the remuneration for the services is fair-market value. If you do not have your act in order, in respect of documenting the payment of management or administration services, I suggest you make this a high urgency task.

Individual Taxpayers


From an individual taxpayer perspective, we are still receiving information requests to provide support for interest deduction expense claims, foreign tax credit claims and income matching requests (technically a separate program). In addition, I have seen several requests to support alimony payments.

I have also seen information requests for individuals that are owner-managers of corporations and have claimed employment expense based on a T2200 form signed by their related company. If you want to read an excellent summary about deducting expenses as an employee, this tax bulletin by BDO Canada LLP titled “Deducting Expenses as an Employee”, is very exhaustive.

For those not aware, a T2200 form must be completed by employers for their employees to deduct employment expenses from their income. Many people receive these forms from their employers each tax season, so they can claim their auto expenses related to their job, however, other people use the form to claim a home office expense or various other employment expenses related to their job.

The CRA requests have been specifically for those individuals who are shareholders of the corporation issuing the T2200; we have not seen a general review of employment expenses for employees (although I do see these occasionally).

In reviewing corporate shareholders employment expenses (most notably auto and home office expenses) the CRA had been disallowing these expenses in many cases, based on a lower court case decision.

However, it is my understanding the CRA is considering reversing these re-assessments and will set forth new criteria for owner-managers in respect to claiming employment expenses going forward. If you have been re-assessed or are in the middle of objecting, speak to your accountant about this issue, there may be positive news forthcoming.

If you have claimed any of the expenses that are leading to the information requests I detail above, you may want to review your records to ensure you have your documentation readily available in case you receive an information request.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, March 5, 2018

2018 Federal Budget

The Daily Telegraph, a national British newspaper, once commented on a Federal Budget by saying that; a “budget is like going to the dentist, there has to be pain now or the future health of the economy is at risk”. While I may want to debate that assertion another time, I took their comment literally. Last Monday I started off the week with a root canal on my bottom left tooth and was supposed to have an extraction on Friday for another tooth on the top left of my mouth. Unfortunately, or fortunately, I am not sure which, the Friday appointment was re-scheduled until the middle of tax season. Thus, I was not in a good frame of mind to write my usual detailed review of the federal budget, presented last Tuesday, February 27th.

Setting aside my tooth pain, the budget contained surprisingly few new proposals (which you can read about in this excellent BDO LLP budget summary) other than the introduction of new rules relating to the taxation of passive investment income (generally made-up of interest, dividends, capital gains and rental income) in private corporations. Today I will briefly discuss these new rules.

Passive Investment Income Taxation


The initial proposals set forth by the Liberal government in July and October of 2017, in relation to the passive income rules were very complicated and would have been an administrative headache for small business owners and accountants. There was also some concern that the proposals could result in a tax rate approximating 73%.

In issuing the new rules in last week's budget, the government clearly listened to the various comments made by small business owners and their advisors. The new rules are simple and clear and target those taxpayers the government seemed to be offended by in the first place, professionals and other service providers who were accessing the small business deduction.

While the aforementioned taxpayers who have accumulated significant passive assets for retirement based on the old rules will not be happy, there are many other small business owners and professionals, who let out a collective sigh of relief. Corporations (including professional corporations, typically partners in large professional firms) already subject to the general tax rate of 26.5% or so (depending upon your province) and investment companies that hold only passive investment assets, will continue under the current regime without any new restrictions.

Under the new rules, which are applicable for taxation years beginning after 2018 (so for companies with non-December year-ends, the rules may not apply until 2020) the Small Business Deduction (“SBD”) is phased out once passive income exceeds $50,000 at the rate of $5 for every $1 of passive income, or $50,000 for every $10,000 of passive income.

It is important to note that the test is for a corporation and its associated corporations. Therefore, if your operating company has no passive income, but your Holdco has $75,000 of passive income, you must combine the two and your operating company will have a reduced SBD.

The chart below illustrates how this will work.

Passive Income
Earned
Small Business
Deduction Available
$50,000
$500,000
$70,000
$400,000
$90,000
$300,000
$110,000
$200,000
$130,000
$100,000
$150,000
$nil

Somewhat lost in the discussion is that the SBD is just a tax deferral, not an absolute tax savings. For example, if you flow through a $100,000 taxed at the small biz rate and a $100,000 taxed at the general rate to a shareholder, there is likely only a net after-tax difference of a $1,000-$2,000 dollars, depending upon the province. So to be clear, you are not paying more tax, just paying it earlier.

Private corporations subject to the new rules will lose a tax deferral from $1 to around $65,000 or so (depending upon your province and assuming the provinces follow suit. If not, the amount will be lower) if the full $500k SBD is clawed back. In simple terms, at the maximum reduction, you will have to pay $65k (could be less depending upon the province) in tax earlier than under the current tax rules and you lose the ability to grow your retirement assets by the return on that yearly $65k.

Double Your RDTOH Pleasure


Part and parcel of the above changes to the SBD, the government has also proposed to create a second refundable dividend tax on hand ("RDTOH") account for eligible dividends, called, not unexpectedly, the “Eligible RDTOH”.

Under the current rules, where a private company earns investment income, the corporation is taxed at a high rate, typically 50%, of which 30% or so is refundable and 20% is a hard tax. Where the company also earns low rate small business income, the dividend refund can be caused in part from this lower rate tax and the shareholder can benefit from both a corporate dividend refund and a low rate eligible dividend designation.

To prevent this from happening in the future, the new rules essentially create two RDTOH accounts, non-eligible and eligible and upon the payment of a non-eligible dividend, the company must first access its non-eligible RDTOH before it can access its eligible RDTOH. I am sure this is clear as mud.

To further muddy the waters, there will ordering and transition rules, which are described in detail in the BDO tax memo I link to above.

As result of these new rules, which are also applicable for taxation years beginning after 2018, you will want to discuss with your accountant whether it makes sense to pay a large dividend prior to the application of the rules to clear out your current RDTOH.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, February 26, 2018

Prescribed Rate Loans – One Last Kick at the 1% Rate

I have discussed the use of prescribed rate loans several times over the years. In this post, I will review a couple of the best ways to use these loans. However, time is now of the essence, if you wish to implement one of these loans. The current prescribed rate of 1% will be rising to 2% effective April 1st as per this Advisor.ca article and many people only see the rate slowly rising from here over the next few years.

The two most common ways to use a prescribed rate loan are:

1. A loan to a spouse as detailed in this blog post.

2. A loan to minor children using a family trust as detailed in this blog post.

To recap (read the actual posts for all the details), the Income Tax Act contains income attribution rules that typically reallocate income to the higher income earner when he or she tries to income split with his or her spouse or children. However, there is an exception to the above attribution rules where an individual makes a loan to a spouse or minor child and interest is charged on the loan at a rate at least equal to the CRA’s prescribed interest rate at the time the loan was made. The benefit is as follows:

Where the loan carries interest at a rate no less than the prescribed interest rate, the attribution rules will not apply. For the loan to avoid the income attribution rules, the interest owing must be paid each year within 30 days after the end of the year (i.e. January 30th).

For example, say you make a $100,000 loan to a spouse with minimal income. Your spouse will be required to pay you $1,000 in interest by January 30th of each year. However, if they use the loan proceeds to invest in marketable securities and they make a 6% return, or $6,000, your family will have tax savings of up to $2,700 ($6,000-1,000 x 53.5% the highest tax rate in Ontario).

Income splitting with minors can be problematic because minors generally cannot enter into an enforceable contract. Thus, it is suggested that where you make a prescribed loan to a minor, a family trust be utilized to navigate the enforceability issues.

Tax Changes to Private Corporations


As I have discussed on this blog multiple times, the government has implemented changes to the taxation of private corporations. In December they released the legislation in relation to the revised tax on split income rules . We are still waiting (likely in the budget this week) for the rules on earning passive investment income in a corporation.

To date, it does not appear that these rules will impact prescribed rate loans, subject to this weeks budget. However, before you consider implementing a prescribed rate loan, you need to discuss this issue with your accountant to ensure they are onside with the idea and that you clearly understand the requirements and changes in legislation.

Finally, it would be prudent, based on what we know, that the proceeds of these loans only be invested in public marketable securities and not in private corporations or related corporations.

If you are interested in maximizing a prescribed rate loan, you only have a few weeks to get this loan in place to beat the increase to 2%.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.