Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

Home Cents

Managing your household finances

Entry archive:

GlobeCampus.ca (Kip Frasz/The Canadian Press)
GlobeCampus.ca (Kip Frasz/The Canadian Press)

Home Cents

Timely tax strategies for those with extra cash Add to ...

Now that we're past RRSP season, it's time to start thinking about taxes. While it's too late to avoid any tax liabilities on your 2009 return, it's a good time to start planning for 2010.

For those who are in a position to take advantage of them, there are some tax strategies that are particularly appealing right now. If you set up a family trust or a spousal loan, you will be able to leverage the all-time low Canada Revenue Agency (CRA) prescribed rate of 1 per cent, according to Allison Marshall, financial advisory consultant with RBC Wealth Management.

More Related to this Story

This means that if you loan money to a spouse through a spousal loan strategy or loan money to children and grandchildren through a family trust, their annual interest payments are only 1 per cent. The idea is to invest this money and earn a return above 1 per cent. Interest income, capital gains and dividends are all taxed in the hands of the borrower or beneficiary at a lower marginal tax rate. This leads to significant tax savings.

As recently as 2007, the CRA prescribed rate was as high as 5 per cent. "It made it much more difficult to make a spousal loan or trust strategy effective," says Ms. Marshall, "because you need to earn a rate of return grater than the prescribed rate."

The CRA sets the prescribed rate every calendar quarter. It's based on the average rate of a 90-day treasury bill in the first month of the preceding quarter.

"The economy is slowly improving and we expect to see the prescribed rate rise," Ms. Marshall says. "There is an opportunity you want to be timely about. Investors who take advantage of this strategy will be locked in at the rate in effect at the time the loan is established, regardless of subsequent rate increases."

The current low rate will be in effect until March 31, making now the ideal time to lock in.

Given that we're talking about investment income outside of RRSPs, these strategies only make sense for those who have already maxed out their retirement savings and have additional funds to invest and shelter from capital gains tax.

For example, a family trust might be right for you if you have children or grandchildren in private school or in expensive sports or lessons. You can help fund these through the trust. "If you're paying for expenses for your kids or grandkids anyways, it's a great opportunity," Ms. Marshall says. "A child can claim $10,000 of tax-free income."

A spousal loan is designed to benefit couples where one spouse is earning a significantly higher taxable income than the other. This strategy aims to shift capital from the higher income spouse to the lower income spouse in order to take advantage of the lower income spouse's lower marginal tax rate on future investment income. This results in annual tax savings for the family, with even larger tax savings at retirement arising from years of accumulation of capital in the lower income spouse's hands.

There is no administrative cost to setting up a spousal loan. The higher income spouse simply loans to the lower income spouse at the prescribed rate. While the higher income spouse needs to include the interest income in his or her tax return, it's a strategy that can pay off. Alternatively, if the higher income spouse simply gifted the money to the lower income spouse, all of the investment income earned in the account would be taxed at the rate of the higher income spouse.

"In Canada there are not a lot of opportunities to save taxes," Ms. Marshall counsels. "It's a great time to look forward to the 2010 tax year and strategize to save taxes as a family."



Follow us on Twitter: @GlobeMoney

 

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories