Wednesday, 2 January 2013

January 30th 2013, the Canadian Fiscal Pot Hole

Under subsection 74.1(1) of the Canadian Income Tax Act, if one gifts or lends money to one's spouse and the purpose is to split the income from the investment of that money and enjoy an overall reduced tax rate, Canada Revenue Agency (CRA) denies the split income and the donor / lending spouse will have to report that income for tax purposes.  This is referred to as income attribution.  In order to avoid income attribution the money should not be gifted but loaned and interest should be charged at CRA's prescribed rate (currently @ 1%).  What is time sensitive, is the payment of such interest by the borrowing spouse.  The interest has to be paid before January 30th of the following year (ITA 74.5(1)), otherwise the income will attribute back to the lender and the lender should report the income from the investment made by the spouse.

Please note that if instead of cash property with unrealised gain is transferred and the purpose is to enjoy income splitting one should weigh the advantages of having to pay the tax on the realised gain against the benefit of tax savings from splitting the income between the two spouses.  If tax payable on the disposition of the investment property is less than the  tax savings resulting from future splitting of the income from that investment property this transfer should be made and the receiving spouse should pay cash for the fair market value of the property or remain indebted to the transferor spouse and pay interest, as described above, at the prescribed rate by the 30th of January of each year.

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