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March/April 2010

A Tax Perspective on TFSAs, RRSPs and RESPs
The Pros and Cons of Online Investing
Three Red Flags for 2010
ETFs Offer Exposure to Emerging Markets
Canadian ETFs Versus Stocks. The Unfair Advantage.
Contra the Heard Evolves
The "Stop Working" Portfolio Update
RRSP Wisdom
Retirement Planning for Cross-Border Commuters
Coping With a Spouse's Death As a Financial Novice
How to Improve Your Credit
Claiming the Home Renovation Tax Credit
Travel Insurance: Know What You Buy
Taming March's Lion
MoneyDigest - Topics include Vulnerable Euro; For Energy Bulls; Eastern Belle; Wind Power; Dow Underdogs
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Taxes? A different perspective

Interest Rate on Spousal Investment Loans

Brian Quinlan

In early 2002 I wrote on how spouses in different income tax brackets could benefit, in terms of family tax savings, by having a high tax bracket spouse make a loan to a lower tax bracket spouse. The lower tax bracket spouse would use the borrowed funds to invest. The investment income would then be taxable in the lower tax bracket spouse's hands rather than the high tax bracket spouse's hands. This would leave greater after-tax funds for the family than if the high tax bracket spouse had simply done the investing.

Income Splitting

To make this income splitting (or income shifting) strategy work the higher tax bracket spouse has to charge and collect interest on the loan. The interest must be collected by each January 30th, following the previous calendar year in which the loan was outstanding. Where the requirements are not met, the investment income earned will be taxed in the higher tax bracket spouse's hands. In other words, the income-splitting attempt will not work. At the time of the loan the interest rate on the loan cannot be less than Canada Revenue Agency's prescribed interest rate and the interest rate can be capped for the life of the loan. This works well in times of rising interest rates but not so well when interest rates fall as we have seen over the last couple of years.

When all the requirements to charge and collect interest are met, the higher tax bracket spouse reports the interest collected on the loan as income. Conversely, the lower tax bracket spouse deducts the interest in computing taxable income as the borrowed funds have been used to earn income from investments.

Read on...

As It Happens...
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Emerging markets come of age
CIBC's latest Economic Insights

Currency
Scotia Capital's Global FX Research (Daily)

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Emera purchases interest in Nova Scotia wind project
TransAlta awarded 25-year power purchase agreement

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Retirement in North America
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Canadians returning to RRSP Investments
TFSA and RRSP - Which one is for you?
Canada's tax system ranks 28th

Consumer
RBC Canadian Consumer Outlook Index
Special Report on Investor Protection
Ontario car insurance rates increase
12 Critical Tips for Safe Online-Shopping
T ips and advice for U.S. bound travellers

Mutual Funds
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Small cap managers outperform large cap managers
Canadian large cap managers post best return in over 22 years
Real Estate
National resale activity edges down in January
Canada Tightens Mortgage Rules
Canadian acquisition of U.S. property grows
A New Real Estate Comparison Tool
Mortgage brokers weigh in on key RRSP strategies
Fixed or Variable Mortgage Rate?
2010 national real estate forecast for Canada, U.S.
Homeowners and Buyers Should Stress Test their Budget

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