Lock in family loans before rate rises

CRA’s 1% prescribed interest rate won’t last much longer.

A report from KPMG says the rate for family income-splitting loans will likely rise to 2% on October 1, 2013.

The rate has been at its lowest-possible level, 1%, since April 1, 2009. So many planners have used income-splitting loan arrangements with family members to help clients save tax.

Read: Take advantage of spousal loans now

If clients still want to take advantage of this strategy, encourage them to finalize loans by September 30, 2013.

Newport Private Wealth, which also suggests rates will rise to 2%, illustrates the tax savings of doing so. If your client borrows at 1% and invests at 6%, “On a $1 million loan, that means annual net income of $50,000 that can be taxed at lower rates. More importantly, the 1% interest rate is locked in the entire life of the loan, so the tax savings can compound for years.

“If CRA’s prescribed rate goes up to 2%, as expected, delaying [until October] could cost up to $4,600 each year on the same million-dollar loan. If investment returns exceed 6%, the cost would be even higher.”

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